China - Socialist economic development (Vol. 2 of 3) : The social sectors: population, health, nutrition, and education

PUB-3391 A WORLD BANK COUNTRY STUDY VOL.32 VOL. 2 CHINA Socialist Economic Development Volume II The Economic Sectors Agriculture, Industry, Energy, Transport, and External Trade and Finance FILE COPY CHINA Socialist Economic Development Volume I The Economy, Statistical System, and Basic Data Volume II The Economic Sectors Agriculture, Industry, Energy, Transport, and External Trade and Finance Volume In The Social Sectors Population, Health, Nutrition, and Education 。言寥＞ 仕才勵鳥 〕〕；〕〕；〕釁〕 〕算i婼，!“氫斗〕 煩r,‘彎叫 縱勰伐。《 戶＇L二戶吧尸叫 h必卜究，j 巾b二k 糒濤 汗俘 � о °' о ° G+ 'й ,� � о �' тк •ег ° г� ¢, и�рΡ � 0рΡ� w „д О о о� г`� ри �� р„О.О гС ���i �� � й • С! 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"б r. > +. и" � й Q б� � � Е-+ � � �, � Д '� '� v U и •д [ +� �-1 U и •S !1� W СА U f-+ гr"б �� LL �!ч � О..�'., О bo0 °'Lf .д й у ir".. О ! 0 QG г'""'С 'Lч ~1 � U д•��-1 4-i � N W х Н Н Н Contents Volume I. The Economy, Statistical System, and Basic Data The Economy (Main Report) Annex A. Statistical System Annex B. Basic Statistical Tables Volume II. The Economic Sectors Annex C. Agricultural Development Annex D. Challenges and Achievements in Industry Annex E. Energy Sector Annex F. Transport Sector Annex G. External Trade and Finance Volume III. The Social Sectors Annex H. Population, Health, and Nutrition Annex 1. Education CURRENCY EQUIVALENTS The Chinese currency is called Renminbi (RMB). It is denominated in yuan (Y). Each yuan is subdivided: 1 yuan = 10 jiao = 100 fen Exchange rates used in this report are as follows: 1977 $1.00 = Y 1.828 1978 $1.00 = Y 1.661 1979 $1.00 = Y 1.541 WEIGHTS AND MEASERES Chinese statistics are usually in metric units; in addition, mu and jin are often used: 1 mu = 0.1647 acres = 0.0667 hectares (ha) 1 jin = 0.5 kg PRINCIPAL ABBREVIATIONS BOC - Bank of China CAAC - Civil Aviation Administration of China MOA - Ministry of Agriculture MOC - Ministry of Communications MOE - Ministry of Education MOF - Ministry of Finance MOFT - Ministry of Foreign Trade MOPH - Ministry of Public Health MOR - Ministry of Railways NMP - net material product SCCC - State Capital Construction Commission SEC - State Economic Commission SPC - State Planning Commission SSB - State Statistical Bureau FISCAL YEAR January 1 - December 31 TRANSLITERATION The Pinyin system is used in this report. - vi - Preface This report is based on the findings of an economic mission compris- ing several teams, which visited China for periods of 4-5 weeks between October and December, 1980. The mission was led by Parvez Hasan (mission chief) and Edwin R. Lim (deputy mission chief), and also consisted of Ramesh Chander (statistics), Mats G. Hultin (education), Dean Jamison (population, health and nutrition), Adrian Wood (principal economist), Shu-Chin Yang (foreign trade), S. Josephine Woo (research assistant), Helen Kung (mission secretary), and the following teams: Agriculture: David J. Turnham (team leader), Theodore J. Goering (agricultural economist), Wen-poh Ting (agriculturalist), and Henri Boumendil (irrigation engineer - consultant); Energy: Bernard Chadenet (team leader - consultant), Darrel G. Fallen-Bailey (energy resources and technology), David P. Hughart (energy economist), Kuo-Chang Ling (power engineer), and Vatsal P. Thakor (power engineer); Industry: Donald B. Keesing (team leader), Magdi Iskander (industrial economist), and H. Geoffrey Hilton (industrial engineer); Transport: Vincent W. Hogg (team leader), Jacques Yenny (transport economist), Ernst G. Frankel (port specialist - consultant), Paul Banner (railway specialist - consultant), and Clell G. Harral (highway specialist). In addition to the mission members, the following also participated in the preparation of the report: Nancy Birdsall was the co-author of Annex H (Population, Health and Nutrition); Sulekha Patel, Suan Ying, and Janson Chang assisted the mission members in research; Linda Mitchell edited the report; and Dianne Esson was responsible for its processing. Hollis B. Chenery (Vice President, Development Policy) and Caio Koch-Weser (Chief, China Division) participated in the final two weeks of the mission. During its stay, the mission was hosted by the following organiza- tions in the Chinese Government: the Ministry of Finance, which coordinated the mission-s overall activities; the State Planning Commission and the State Statistical Bureau, which worked mostly with the general economic team; the Ministry of Agriculture, with the agriculture team; the Ministries of Communi- cations and Railways, with the transport team; the Ministry of Education, with the education team; the State Economic Commission, with the industry team; and the Ministries of Electric Power and Coal, with the energy team. In addition to the many officials of these ministries who worked closely with the mission during the two months, the following Chinese economists worked with the various teams: Zhu Rongji (State Economic Commission), Xing Guang (Ministry of Finance), Zheng Li (State Planning Commission), Zhao Renwei (Economic Institute, Academy of Social Sciences), Zhu Fulin (Ministry of Finance), Chen Lian (Agriculture Institute, Academy of Social Sciences), Hong Huiru (Industry Institute, Academy of Social Sciences), Gong Shaowen (Ministry of Agriculture), - vii - He Enlin (Ministry of Railways), Luo Yunqin (Ministry of Communications), Cao Weigong (Ministry of Electric Power), and Gao Huan (Ministry of Education). Xing Guang, Zhao Renwei, Zheng Li and Zhu Fulin also prepared brief background papers for the general economic team. This list is far from exhaustive; the mission teams were also assisted by many others who are not mentioned above, including officials at the government agencies and institutions that the teams visited on field trips. The mission teams travelled extensively outside Beijing. During the two months, the various teams visited two other municipalities, Shanghai and Tianjin, and seventeen provinces - Fujian, Gansu, Guangdong, Guizhou, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Liaoning, Shaanxi, Shandong, Shanxi, Sichuan, Xinjiang, and Zhejiang. To prepare for its work in the field, the mission commissioned a number of background papers on China's economy to be written by foreign scholars, including: Randolph Barker, Cornell University (agricultural development); Wlodzimierz Brus, Oxford University (socialist planning); P.C. Chen, Wayne State University (population and health); Mark Elvin, Oxford University (historical background); Shigeru Ishikawa, Hitotsubashi University (macroeconomic issues); Nicholas Lardy, Yale University (agricultural planning); Dwight Perkins, Harvard University (rural development); Thomas G. Rawski, Toronto University (industrial development); Ashwani Saith, Oxford University (brigade enterprises); Peter Schran, University of Illinois (agricultural statistics and prices); and Christine Wong, Mount Holyoke College (small-scale industries). These papers were generally completed during the summer of 1980 and were discussed with the authors prior to the mission's departure for China. This report was first issued on June 1, 1981. It was reprinted on March 10, 1982, at which time changes were made in a few places, mainly to correct factual and statistical information. The present printing is the first to be released for public distribution. - viii - Annex C Agricultural Development Contents 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . 7 A. Historical Overview . . . . . . . . . . . . . . . . . . . 7 B. The Economic Geography of Chinese Agriculture . . . . . . 8 The Northeast Region . . . . . . . . . . . . . . . . . 11 The Border Provinces . . . . . . . . . . . . . . . . . 12 North China . . . . . . . . . . . . . . . . . . . . . . 13 East China . . . . . . . . . . . . . . . . . . . . . . 14 The South Central Region . . . . . . . . . . . . . . . 15 South China . . . . . . . . . . . . . . . . . . . . . . 16 The Southwest Region . . . . . . . . . . 17 C. An International Perspective of Chinese Agriculture . . 18 Recent Trends in Agricultural Growth . . . . . . . . . 19 The Resource Base for Agricultural Development . . . . 23 Food Supplies and Population Growth . . . . . . . . . . 24 2. BASIC POLICIES AND THE INSTITUTIONAL FRAMEWORK . . . . . . . 26 A. Agrarian Reform . . . . . . . . . . . . . . . . . . . . . 26 Land Reform . . . . . . . . . . . . . . . . . . . . . . 26 Agricultural Cooperatives . . . . . . . . . . . . . . . 28 B. The People's Commune . . . . . . . . . . . . . . . . . . 30 Development of the System . . . . . . . . . . . . . . . 30 The Production Team . . . . . . . . . . . . . . . . . . 32 The Production Brigade . . . . . . . . . . . . . . . . 36 Commune Services . . . . . . . . . . . . . . . . . . . 37 C. State Farms . . . . . . . . . . . . . . . . . . . . . . . 38 D. Marketing, Pricing and Credit in Agriculture . . . . . . 40 Grain Marketing . . . . . . . . . . . . . . . . . . . . 41 Input Supply, Cash Crops and Retail Trade . . . . . . . 43 Agricultural Credit . . . . . . . . . . . . . . . . . . 44 E. Administration and Planning . . . . . . . . . . . . . 46 Administration . . . . . . . . . . . . . . . . . . . . 46 Agricultural Planning . . . . . . . . . . . . . . . . . 48 F. Technical Services and Training . . . . . . . . . . . . . 49 Agricultural Research and Extension . . . . . . . . . . 50 Seed Production . . . . . . . . . . . . . . . . . . . . 52 Education and Training . . . . . . . . . . . . . . . . 52 - 3 - 3. OUTPUT, PRODUCTIVITY AND EARNINGS IN AGRICULTURE SINCE 1952 . 53 A. Overview of Agricultural Achievements . . . . . . . . . . . 54 B. Agricultural Growth in an Economy-wide Perspective. . . . . 56 Phases in Agricultural Development . . . . . . . . . . . 56 Agriculture, Population Growth and Trade . . . . . . . . 60 C. Investment in Agriculture: Land Improvement, Input Supply and Technology . . . . . . . . . . . . . . . 63 Overview . . . . . . . . . . . . . . . . . . . . . . . . 63 Land Development and Irrigation . . . . . . . . . . . . . 66 Manufactured Inputs . . . . . . . . . . . . . . . . . . . 70 Agricultural Research and Extension . . . . . . . . . . . 75 D. Labor, Productivity and Earnings in Agriculture . . . . . . 78 Labor Force Growth . . . . . . . . . . . . . . . . . . . 78 Net Output and Labor Productivity . . . . . . . . . . . . 78 Earnings and Living Standards in Rural Areas . . . . . . 80 4. FUTURE PROSPECTS OF AGRICULTURAL DEVELOPMENT . . . . . . . . . 82 A. A Technical Perspective of Prospects . . . . . . . . . . . 83 Foodgrain Production . . . . . . . . . . . . . . . . . . 84 Oil-bearing Crops and Cotton . . . . . . . . . . . . . . 85 Other Crops . . . . . . . . . . . . . . . . . . . . . . . 86 Other Agricultural Activities . . . . . . . . . . . . . . 86 Foodgrain Requirements . . . . . . . . . . . . . . . . . 87 B. Objectives for Agricultural Development . . . . . . . . . . 89 Agricultural Output and Rural Income . . . . . . . . . . 91 C. Agricultural Policies and Programs . . . . . . . . . . . . 94 TABLES IN TEXT 1.1 Selected Rural Indicators for Major Regions, 1979 Data 10 1.2 Production, Yields and Trend Growth: Selected Crops . . . . 20 1.3 Other Output Indicators . . . . . . . . . . . . . . . . . . 21 1.4 Selected Crop Yield Comparisons: China and High-Yield, Large-Scale Producers. . . . . . . . . . . . . . . . . . . 22 1.5 Comparative Indicators of Resource Inputs in Agriculture . . 25 2.1 Impact of Land Reform . . . . . . . . . . . . . . . . . . . 27 2.2 Development of Agricultural Cooperatives, 1950-56 29 -5- 3.1 Growth Rates of Gross Agricultural Output, 1952-79 . . . . . 57 3.2 Growth Rates: Agricultural Production and Population 1952-79. . . . . . . . . . . . . . . . . . . . . . . . . . 60 3.3 Food Production: Kg Per Capita Per Annum, 1952-80 . . . . 62 3.4 Accumulation and State Support for Agriculture, 1952-79. . . 64 3.5 Estimates of Arable and Sown Area, 1949-79 . . . . . . . . . 67 3.6 Major Agricultural Machinery, 1952-80. . . . . . . . . . . . 71 3.7 Production of Agrochemicals, 1952-80 . . . . . . . . . . . . 72 3.8 Growth Rates of Net Output, Labor Force and Productivity in Agriculture, 1952-79. . . . . . . . . . . . . . . . . . 79 4.1 Illustrations of Supply-Demand Balance in Foodgrains, 1990 . 88 MAPS (Located at the end of Volume II) IBRD 15530R2 China: Agricultural Regions and Major Crops IBRD 15527R2 China: Hydrology and Water Conservancy Works 딧 1. INTRODUCTION 1.01 The Chinese agricultural system provides sustenance to nearly one billion people and is the main source of livelihood for some 800 million agricultural workers and their dependents. On either count, the system is by some margin the largest in the world agricultural economy. Historically a leader in agricultural technology, Chinese agriculture is renowned for its intensive use of arable land based on extremely high man/land ratios. Thus, China's agricultural sector accounts for less than 8% of the world's arable land but provides enough food for about 22% of the world's population. Among the developing countries, China accounts for more than 30% of the total farming population, roughly matching the combined totals for India, Indonesia and Brazil. 1.02 This chapter provides a general introduction to Chinese agriculture as a background for the more detailed description and analysis that follow. It comprises a brief account of the historical evolution up to the founding of the People's Republic in 1949 (Section A), a description of the economic geography and major agricultural regions of China (Section B), and an international perspective on the current status of development and recent trends (Section C). A. Historical Overview 1.03 Evidence from eastern China indicates the existence of an agricul- ture based on cereals dating from at least 7000 B.C. and an agriculture based on sustained field cropping from 1000-700 B.C. Thereafter, the gradual extension and development of agriculture were the essential underpinnings of a civilization whose artistic and scientific accomplishments span some three millennia of human history. The first recorded land tax dates from 594 B.C., and large quantities of land were being bought and sold by 400 B.C., by which time substantial works for irrigation, drainage and flood control had already been constructed. 1.04 There was further rapid development of agricultural technology between 800 and 1200 A.D., particularly in southern and eastern China. For lowland rice, sophisticated land preparation and transplanting techniques were introduced, and a considerable variety of improved seeds suited to local climatic and soil conditions was developed. During this period mechanical methods of lifting water, as well as improved gravity flow irrigation and flood control systems, became widely used. Thereafter, the historical records suggest that these technological advances were improved relatively little during the next several centuries. Rather, there was a progressive expansion in the arable area (including extensive cultivation of marginal areas for dryland farming), coupled with some intensification by means of double crop- ping and irrigation, with change dominated by demographic expansion. This - 7 - - 8 - pattern persisted up to the end of the presocialist era in 1949, although the opening of China to Western influence and commerce brought about some changes, e.g. maize and groundnut cultivation in northern China, improved strains of cotton and tobacco, and market gardening to serve the growing industrial centers of eastern China. Agriculture in other parts of the world benefited from access to Chinese crops and technology, for example, soybeans, tea cultivation methods and sericulture. 1.05 By about 1750, the social structure of agriculture had evolved towards landlord-tenant systems (based on rental and sharecropping) and small-scale owner-cultivators. Within the limits of available technology, the extraordinary skills of the farmer and high standards of crop husbandry continued to sustain remarkably high levels of land productivity. Perhaps from as early as the seventeenth century, rice yields exceeded 2 tons per ha, which is about the current level for developing countries (excluding China). But extreme poverty - associated with a precarious balance of land and population, and with a sizeable group of landless and near landless peasantry - was characteristic of many areas of China. Quite minor aberrations in weather (flood, drought) could upset the food balance at a cost of millions of lives./1 Internal upheavals and international warfare in the twentieth century weakened the limited development of agricultural services and led to the widespread destruction or neglect of vital rural infrastructure. In the early 1930s, under the influence of the Great Depression, agricultural prices fell sharply, which led to distress sales of land and to tenant bankruptcies. Agricultural production recovered and reached new record levels in 1936; thereafter, the outbreak of war with Japan in 1937, followed by renewed civil war in 1947, prevented these levels from being surpassed until the mid-1950s. B. The Economic Geography of Chinese Agriculture 1.06 Agriculture in a large part of China is severely limited by terrain and rainfall. Most of the country is too mountainous or too dry for crop farming, and considerable areas of some potential are remote from the main population centers and markets. A major determining feature is the huge mountainous land mass of of western China, the Qinghai Xizang plateau, /1 Writing in 1931, the historian R. H. Tawney described the situation as follows: "There are districts in which the position of the rural population is that of a man standing permanently up to the neck in water, so that even a ripple is sufficient to drown him. The loss of life caused by the major disasters is less significant than the light which they throw on the conditions prevailing even in normal times over considerable regions." R. H. Tawney, "Land and Labor in China" (London, George Allen and Unwin Ltd., 1932). - 9 - covering 2.2 million sq km at an average height exceeding 4,000 m. Most of the major rivers - the Huang He (Yellow), the Chang Jiang (Yangtze), and the Zhu Jiang (Pearl) in the south flow east and southeast from these mountains to form the densely settled valleys and flood plains of eastern China./1 If the country is roughly halved along longitude 103, over 90% of the population and about the same proportion of agricultural output are located in the eastern half. 1.07 Climate and topography together define a variety of agricultural regions, the major factors being soils, rainfall and the length of the growing season. Seven regions/2 have been distinguished, but in a country of the size and diversity of China, several dozen separate zones would be needed to define accurately areas with similar agricultural production systems and potential. A further approximation is the alignment of these regions with provincial boundaries (to simplify interpretation). Map IBRD 15530R2 (located at the end of Volume II) shows these regions; regional data are summarized in Table 1.1 (together with notes of some important definitions); main features are discussed in paras. 1.11-1.41 below. 1.08 The climatic variations over such a large and diverse land mass facilitate the cultivation of a wide variety of crops and provide some guaran- tee that a harvest failure due to weather will not affect more than a relatively small part of the total cropped area. Significant differences in farming systems occur in moving from north to south and from east to west. Starting in the north and moving southwards, the intensity of cultivation increases in four distinct stages: (a) single-crop, spring-grown temperate cereals in the northeast; (b) a winter wheat/summer crop cycle (three crops in two years) in the North China Plain; (c) double cropping with a summer rice crop in the Chang Jiang basin of central China; and (d) double (and occasional triple) cropping in the tropical southern coastal areas. Important changes over the past 30 years include the opening of much new land in the northeast (especially in Heilongjiang); extensive flood control and irrigation (including power irrigation); and the development of improved crop varieties, especially of dwarf and semidwarf fertilizer-responsive varieties of rice and cold-tolerant, quick-maturing wheats. Intensive farming systems are practiced in the North China Plain, the Chang Jiang basin, the upland basin of Sichuan and the southern coastal areas. In the northeast temperate zones, the opening of new land for agriculture (often through establishment of state farms) is accompanied by heavily mechanized farming on relatively large blocks of land. Close to half the arable area is irrigated (45 million ha,/3 nearly triple the /1 The Manchurian Plains in the northeast form part of a different river system, with the Liao He flowing south into the Bo Hai and the Songhua Jiang flowing northeast into Soviet Asia after joining the Heilong. /2 Nine agricultural economic regions have been distinguished by the Ministry of Agriculture. /3 This includes areas totaling 35-40 million ha, which, because of their well-developed irrigation systems and good flood protection, the Chinese refer to as "high and stable yield" areas. 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J1<леви) � Р Ceeгrsl-8ontn Сh1ы 2Ь.14 13.2 119.15 34.1 2D3 109 96.7 115 16.3 ].2 5I.6 16.1 д50 11Э 9.13 9.8 0.08 ЬВ 66 325 0.lВ 102 81 48.] t5.2 2.8 1,5 Ь.О 12.2 8) (Битл, IЬnel, J1ве`г1) � 9I 8outh Ф4т 16.]Ь 10.1 10{.80 12.6 160 еб ]9.5 95 65.Э 16.д 36.] 11.1 3Э0 89 1,34 ].2 0.0] 59 Ы 305 0.34 80 ВВ Э8.1 11.9 2.0 1,I 5.5 11.3 Ю �т0овл8дт8. 4,врргl, Ри)1вv� 9II 5outhveвt fЫm 19.89 12.6 1д1.72 l6.1 1Ы ]5 Ьд,] ]В 52.3 32.2 д6.2 13.9 Э2] 8] 1),ЭО 11.4 0.08 ЬВ 79 !62 0.13 ]4 6д ]2.В 22.В 20.0 10.9 2.] 5.5 )3 (8lепиве, 641г1юи, тптл) Тлгв1 158.63 100.0 В65.88 10р.0 1В1 100 8].д 300 ЭВ.В 100.0 J]2.2 100.0 793 100 99_50 1рр.0 0.118 300 д5 1д9 0.1]6 300 100 319.] 100.0 163.1 100.0 49.1 100.0 100 1b[вв: Пrовв .1ег1сиl[игвl Ои[ри[г Iocludu сгар Рглдис[lол, ffвherle{, Еогввгrl, иtввl hтпвлдг) еМ Ьгlgвде�втgед гигаl ev[<гргlеев еМ о[лег в1де11пе ес[1v1t1<в. аег.1 powl<с1лп: епo-Тиг рлриl<г1т. тгЗиди .11 сп< рлллгып роw3всlт, вп.< ог .ло. .т< т.иг<.в, .с.а «1лРее., с[г., vo[ 1лсlлдед т см со�,т рорлlв[1оп or ет .1111т. ' D1ecc1W[ed Сл11ег[1к Iасове: Iпеок (1п сввИ влд 41vd) Етоа слllессlп wst веt1в1t1ев 61вСт1Еиеед с млегв о! ргодис[1т [еввв. Thаве двtв еасlиде ргlл[е lvговвв (frm vвгlоив поивалоlд вс[1v1[1ев), гевl[tигев, слвИ vegeв р+1д г vor4ere 1п гигеl т[егргl<ее вМ ceswl 1вбог ре)веп[s. Ivcpв< д1е[гlли[ед 1п kled (и1п1у gгвlе влд едlлlе л11) 1в ввlиед е[ I9]8 ргlеев; еавп lпса вг сиг evt (19)9) ргlсее. Begloml д1[[еглпсев rould DrOW6y Ье вllgпсlу теди<ед 1Е lvелве 1п klod wre геvвlлед ас шггепе угlгее. Сгиiп Prodvctton: Отllled gтеlп. Iveludeв [и4г< (в[ 1/5 л£ [И< vet w1бn[) вед воТлевт. Сглррlт Iедва: Iocludes greee uvuce вМ Earage егорв. тг.гелнис[т lпдвг: т.ед оп п,�мг. лг 1.гее- <ю ид1,�-е1:м [nгсог. 1п те, р1т v<досгlи гг.ггог. 1пг2леед вг . 1:д л[1о г<lвгп< [л тд1� впд 1<rs<-вlид сг.гслге. 8оигеег ргlvед tгов off1c1a1 двсв виррl4ед Со the вlееlле. - 11 - area in 1949). Moving southwards, grain yields increase sharply, with extensively double- or triple-cropped land in some eastern and southern areas producing four to five times as much as areas in the colder, drier northeast and northwest. The population sustained by crop agriculture is greater in the more favored areas, which have a much smaller arable area per farm household. 1.09 China's range livestock (sheep, goats, cattle, camels) are found largely on 200 million ha of grassland in the north and western border regions. However, most animal production is accounted for by pigs and poultry, which are reared in private plots under intensive systems and inte- grated with crop production. Production is concentrated in regions with denser populations and easy access to markets. China's pig population of 320 million head in 1979 is the largest in the world by a considerable margin. Pigs are probably still the major source of cash income for the peasant, continuing a tradition of great antiquity. 1.10 Agricultural incomes and living standards tend to vary according to agricultural productivity and market proximity. Probably the most disadvan- taged areas are the northern uplands, where temperature often limits cropping to a single season, rainfall is sparse and unreliable, topography restricts irrigation, and market access is made difficult by poor communications. These conditions, which are typical of parts of Gansu, Ningxia, Shaanxi, Shanxi and Henan, give rise to pockets of poverty in northern China roughly coterminous with the loess plateau. Southern and western upland areas are also generally poor, though the cropping possibilities are somewhat better; upland cash crops, forestry and livestock have been developed here and are exploited to some extent through household enterprise. Low-income areas are also found in some of the lowlands, for example, the saline areas of the North China Plain and flood prone areas of Anhui. The most favored areas include the northeast, with its relatively low population density in relation to land resources, and central and eastern China, where favorable land and climatic conditions allow intensive cropping systems and good market access permits substantial rural industrialization. Income derived from collective activities is generally two or three times higher in the more favored areas than in the poorer areas; income derived from household activities (which in the nation as a whole accounts for about 30% of total peasant income) also tends to be higher in the more favored zones. The Northeast Region 1.11 This area, comprising the provinces of Heilongjiang, Jilin and Liaoning, accounts for 7% of China's rural population (64 million in 1979) and almost 10% of total gross agricultural output (measured in 1970 constant prices). An area of late settlement (the first railway was not opened until the twentieth century) and subsequently with strong development of industry and urbanization, the population density in the rural areas is comparatively low. The region still accounts for a substantial proportion of China's - 12 - potentially arable areas, including an estimated 8 million ha in Heilongjiang. About 12% of the arable area is irrigated. Agricultural output per head, some 30% above that for China as a whole, is higher than in any of the other six regions. 1.12 The region has the typical continental climate, with severe winters and hot summers. The frost-free period ranges from 140 days in the north to 180 days in the south. Mean annual precipitation varies sharply with location and averages about 600 mm per year. Soil quality is variable, but includes fertile loess soils in the west-central area and ribbons of alluvial soils along major river valleys, including black earths in the former swamp areas. 1.13 Spring wheat is the dominant crop in the north and west, while corn is important where precipitation is adequate (probably in less than 30% of the region). Millet is a transition crop between corn and wheat areas and soy- beans are concentrated along the Songhua and Liao rivers. The region is China's major sugar beet area. Some sorghum (gaoliang) is produced, and rice cultivation has been pushing northward with the advent of high-yielding, short-season varieties. Single cropping predominates over most of the region. Grain production in the region, particularly in Heilongjiang, has grown more rapidly than in any other sizeable area in China, largely because of the area's relatively good soils and new land development. Crop yields are erratic, varying with moisture availability. In 1979 gross grain production was some 36 million tons, about 11% of the national total; almost 40% was sold to the state, close to twice the national average. 1.14 The cultivated areas are mainly in the rolling plains and valleys where extensive swamp drainage has taken place. After reclamation, sizeable areas are used as state farms, which average as much as 20,000 ha in Heilongjiang and account for about 15% of the region's total cultivated area. State farm lands are heavily mechanized - typically over 90% is tractor plowed and about 80% machine harvested; in Heilongjiang, average grain output per worker on state farms approaches 9 tons, compared to a per worker output of less than 1 ton nationally. Distributed collective income (DCI) in the communes was Y 114 per capita in 1979 (about $76 at the current exchange rate), the highest regional average in China; per capita income on the state farms was Y 255 in 1979. The Border Provinces 1.15 This region, comprising Nei Monggol (Inner Mongolia), Ningxia, Gansu, Xinjiang, Xizang (Tibet) and Qinghai, forms a vast border periphery stretching north and west along China's land frontiers. With extensive arid and semi-arid areas and high mountains, population is sparse and agriculture is limited, Thus, although the region includes almost half of China's land area, the rural population (51 million) accounts for only 6% of the total and the region produces only 5% of total gross agricultural output. With important ethnic minority populations, Xinjiang, Xizang, Ningxia and Nei - 13 - Monggol are designated autonomous regions; Qinghai and Gansu also include sizeable minority groups. Gross agricultural output per capita was about 90% of the national average in 1979, and grain production (at about 315 kg per capita) was lower than in the other six regions and only some 80% of the national average. The per capita DCI was also below the national average at Y 77, but the aggregate conceals large differences within the region, with averages exceeding Y 100 in the western areas and falling to Y 57 in Gansu (which accounts for about one third of the region's population). 1.16 The climate is characterized by a long, cold winter (year round in the high mountains) and annual rainfall declines to less than 50 mm in the northern and western parts. Agriculture is dominated by semi-nomadic herding of sheep, goats and horses on the extensive rangelands. The region sustains some 95 million sheep and goats (52% of the national herd), including 60 mil- lion sheep, mostly reared for wool. Considerable efforts are in progress to develop the rangelands through improved pastures and breeding stock (including beef cattle), plus irrigation for winter sileage. Crop development is mainly limited to summer cropping of irrigated perimeters along the upper reaches of the Huang He and its tributaries, and of oasis-type irrigated areas in Xinjiang and sheltered valleys in Xizang and Qinghai. Much of this develop- ment is relatively high cost, but the authorities have given considerable emphasis to these border areas since the early 1950s, and, especially in Xinjiang, population growth has been considerably above the national average. Rainfed crop agriculture is largely limited to the southern part of Gansu and higher rainfall areas of Nei Monggol. Northeastern Nei Monggol is an important forestry area. North China 1.17 In terms of gross production, population and grain output, this is the most important agricultural region in China. It includes five provinces (Shandong, Shanxi, Shaanxi, Hebei, Henan) and two municipalities (Beijing and Tianjin), has 27% of China's rural population (229 million in 1978), and accounts for a similar percentage of total production. The vast and densely populated North China flood plain, which forms the heartland of the region, is divided into northern and southern sections by the Huang He. To the west, the upland loess plateau of Shaanxi and Shanxi is in many respects a distinct subregion in which soil and climate have permitted an extensive, but risky, rainfed agriculture. The easy erodibility of these loess soils has created serious problems both within these two provinces and downstream on the plain where the Huang He deposits its heavy silt loads. The alluvial plains comprise mainly alkaline soils, often of immense depth and generally of moderate fertility. Along the coast of northern Shandong and in the Huang He delta, poor drainage is a serious problem and much effort is being put into corrective measures to reclaim or upgrade some 6 million ha of soils affected by salinity. 1.18 Annual precipitation is in the range of 600-800 mm (lower in the western plateau areas), but geographical and interyear variations are large. - 14 - Winters are severe (January temperatures average about -40C, lower in the western areas) and summers are hot (July temperatures average 26-280C). 1.19 Winter wheat is the dominant crop and is grown on about 30% of the total arable area. In the northwest, a typical rotation would be winter wheat planted during late September and harvested in June, followed by grain, sorghum or millet as a drought-resistant summer crop. On the plains, wheat predominates as the winter crop, while the summer crops may be millet and sorghum, corn and soybeans, and cotton, rice and sweet potatoes, depending on precipitation and soil quality. Cotton occupies about 10% of the cropped area in the southern plain and is particularly important along the Huang He. Groundnut is a major crop in Shandong, which is by some margin the most important center for this crop in China. The cropping index is about 140% for the region as a whole but is lower in upland Shanxi (110%). 1.20 The most rapid growth of grain production in the region has taken place along the coast and in the southeast; it has been achieved through improved water control, increased use of fertilizer and reclamation of saline soils. Much of the growth of grain production north of the Huang He has been associated with improved varieties of winter wheat. In the more arid northwestern part of the region, low, erratic rainfall and more limited irrigation prospects set definite limits to future yield and area increases. The region accounts for roughly half of total power irrigation development in China, most of which was developed in the 1960s and 1970s. Although several new irrigation schemes are nearing completion, limited groundwater may pose increasing problems for future development. About one half of the arable area is irrigated. 1.21 The average per capita DCI in the region's communes (Y 79 in 1979) is slightly below the national average, despite substantially higher incomes in the rural periphery of Beijing, Tianjin and other major urban centers. This relatively low figure reflects the importance of extensive low-income areas, especially in Henan, where the average per capita DCI was only Y 63 in 1979, or 73% of the national average. East China 1.22 This region, comprising the provinces of Anhui, Jiangsu and Zhejiang, and the municipality of Shanghai, is second only to the Northeast Region in terms of per capita income and to North China in aggregate agricultural output and grain production. With a rural population of 138 million in 1979, the region accounted for 20% of agricultural production and 60 million tons of grain. Since the region includes China-s largest urban area (Shanghai), important markets also exist for the livestock and poultry, vegetables and fruits produced through small-scale enterprises, as well as for agricultural raw materials and commune-produced light industry components. Close to 30% of the nation's gross output from rural industry originates in this region - in per capita terms more than twice the average for the rest of China. - 15 - 1.23 The Chang Jiang crosses the central part of the region and, along with its tributaries, provides much of the irrigation that permits intensive land use. The region is divided into three broad plains: the Jianghua Plain to the north of the Chang Jiang in Jiangsu, the Jiangnan Plain south of the river, and the great Chang Jiang delta. The plains are low-lying, with good alluvial or lake laid soils that are generally neutral or slightly acidic. Salinity is a problem in a narrow belt of coastline soils. Much of the arable land of the three plains has been used for rice cultivation for over 1,000 years. 1.24 Proximity to the East China Sea and the lack of topographic obstruc- tions create a modified marine climate. Temperature extremes are avoided and the growing season is from 230 to 250 days. Precipitation along the Chang Jiang is about 1,000 mm, but declines towards the north; it is well distri- buted throughout the year, with abundant rainfall during the summer. The cropping index for the region as a whole exceeds 200%, and Zhejiang, with an index of 247%, has the highest cropping intensity of any province in China./l 1.25 Rice is the dominant crop, but cotton, wheat, corn, sorghum and vegetables are also important. Most of the area is double cropped (wheat/ rice) and in some locations a three-crop-in-two-year system is used. Production of three crops per year occurs in some locations but is declining in importance. The lower Chang Jiang Plain is one of China's most important cotton producing areas. Crop yields in the region significantly exceed national averages. Some 69% of the area was irrigated in 1979, the highest percentage for any region. 1.26 Grain production appears to have grown at about 3% p.a., with the slowest growth in Anhui, where moisture limitations and flooding are a severe handicap to increased production. Completion of the Jiangsu Water Control Project in 1977 and two large fertilizer plants (Nanjing and Anqing), together with planned renovation/enlargement of the Grand Canal, should provide the means for steady future increases in grain production in the region as a whole. Relatively high incomes in the region as a whole mask considerable differences between the highly developed lower Chang Jiang areas, centered around Shanghai, and the northern part of Jiangsu and Anhui, which are essentially part of the North China Plain in terms of settlement patterns, crops and income. The South Central Region 1.27 This region, comprising the provinces of Hubei, Hunan and Jiangxi, is noted for grain production and freshwater fisheries, based on the extensive lakes that characterize the low-lying middle reaches of the Chang Jiang basin. The rural population of 119 million (16% of the national total) produced some /1 Chinese data of cropped area include short maturation forage and green manure crops. - 16 - 15% of gross agricultural output in 1979; total grain output was some 54 mil- lion tons - in per capita terms second only to the Northeast Region in production. 1.28 The region's topography is composed of plains broken by relatively low-lying hills. The Chang Jiang traverses the northern part and several smaller tributaries originate in the mountains to the south. The river systems include a number of rich alluvial plains and deltas, and regional soils vary widely depending on parent material, elevation and precipitation. Drainage is a serious problem in the lake areas, particularly in southern Hubei. 1.29 Precipitation in the region is variable, ranging from 700 to 1,500 mm per year and declining from southeast to northwest. The growing season ranges from 240 to 320 days. Summers are warm and humid (July average of 280C) while winters are dry and comparatively mild (January average of 70C). With favorable soils and moisture conditions, land is intensively cultivated; the region's cropping index of 225% is the highest regional average in China. 1.30 Rice is the most important crop of the region and is generally double cropped with wheat. Single-crop wheat is grown in some of the nonirrigated highlands of Hubei and cotton is grown in the drier parts of the province; occasionally the cotton is interplanted between rows of an early spring crop to allow triple cropping. Tea is an important upland crop in the southerly areas. Intensive aquaculture is practiced in the lakes and ponds. 1.31 Grain production appears to have grown by about 2.9% in recent years - a relatively high growth rate, which reflects a strong upward trend in Hubei. Grain production appears to be less variable than in any other region. With a large chemical fertilizer plant on-stream in northwest Hubei, and extensive irrigation projects under way along the Han river, grain production over the next several years should grow nearly as rapidly as in the recent past. There are also good prospects for diversified cropping (including fast growing timber species, orchard crops and further tea development) and animal husbandry (cattle) in the upland areas that are not suited to rice cultivation. The region enjoys a comparatively high income level: the DCI per capita was Y 96 in 1979. South China 1.32 This region, comprising the provinces of Guangdong and Fujian and the autonomous region of Guangxi, lies mainly in the humid subtropics. It accounts for a little over 12% of China's rural population (105 million) and 10.6% of total agricultural output. The topography is mostly upland, with mountains, steep hills and dissected plateaus comprising over 80% of the land area. Agriculture is concentrated in the numerous river valleys and small flood plains, of which the largest, comprising about one million ha, is formed by the Zhu Jiang delta. - 17 - 1.33 The climate is dominated by a well-developed monsoon. The growing season lasts nearly year round, with several stations reporting 350 frost- free days per annum. Precipitation ranges from 1,500 to over 2,000 mm, depending largely on topography, and is heavily concentrated during the April-September period. Typhoons are a problem at certain times of the year. 1.34 The most important soils from an agricultural viewpoint are the alluvial deposits along the river basins. These are of good texture and structure, and, with irrigation, are intensively used for rice and vegetables. Away from the rivers, the quality of soils deteriorates; many have been leached and eroded, and they contain little organic matter. 1.35 Rice is the dominant crop, occupying 60-65% of the cultivated area, but other important crops include sweet potatoes and corn. Most of the rice is double cropped over most of the plains area, sometimes with sweet potatoes, rapeseed or wheat grown during the dry season. The region is also the center for China's production of tropical crops, including sugarcane, pineapple, rubber and cocoa. The cropping index exceeds 200%, with some triple cropping in western Guangdong and on Hainan island. The annual rate of growth in grain production appears to have been 2.0-2.5%, with all of this increase coming from increased yields. In view of the limited areas with good soils, rough topography and the already intensive use of land, it may prove diffi- cult to maintain recent growth rates in grain production, although the prospects for further growth of cash crops such as sugar and rubber appear to be good. 1.36 The average DCI per capita, at Y 80 in 1979, was slightly below the national average, but income from private agriculture may be relatively high in this region. There is considerable disparity between the prosperous lowland areas and the uplands, where poverty is extensive. The Southwest Region 1.37 This region, comprising the provinces of Sichuan, Yunnan and Guizhou, is mostly mountainous uplands, with the significant exception of the large inland basin of the upper Chang Jiang, the so-called Red Basin of Sichuan, which comprises about 5 million ha of croplands. In 1979, the region included close to 17% of the nation's rural population (141 million) but produced only 12.6% of total gross agricultural output. With limited arable land and irrigation potential (cf. Table 1.1), its sown area per capita is the lowest regional figure. The region's DCI per capita, at Y 65 in 1979, was the lowest regional average; Guizhou, with a per capita income of only Y 46, was the poorest province in China. 1.38 The region's climate varies widely, reflecting the considerable differences in topography and elevation. In the mountainous areas, precipitation varies from 700 mm in the north to over 1,500 mm in the southerly exposures; at lower elevations the climate is subtropical, with rainfall concentrated in the summer months. Northwest Sichuan forms part of the Xizang massif where much colder temperatures and dry conditions prevail. - 18 - The Red Basin itself enjoys a remarkably mild climate and favorable rainfall (1,000-1,200 mm) because mountains to the north prevent the intrusion of cold, dry air from Mongolia, while the Yunnan plateau to the south is not high enough to impede the flow of the summer's tropical monsoonal air masses. The growing season in the Red Basin lasts from 260 to 340 days, slightly longer than in Yunnan and Guizhou. 1.39 Crop agriculture is dominated by the Red Basin, whose favorable climate, excellent soils and extensive irrigation combine to produce some of the most productive and intensively farmed land in China. Many crops are grown, with winter crops including wheat, rapeseed and barley, while summer crops are dominated by rice but include significant quantities of corn, cotton and sweet potatoes. Rice yields approach 6 tons per cropped ha in some parts, which is about equal to rates achieved in the most favorable growing areas of East and South China. Elsewhere in the region, the better alluvial soils are found in narrow strips along the stream beds, while upland soils are generally heavily leached and acidic. Crops are similar to those of the Red Basin, with rice as the dominant summer crop. The cropping index in the Red Basin area exceeds 200%, but in the region as a whole it is well below the rate achieved in other southern areas of China. Sichuan and Yunnan are noted for a well-developed pig industry. Stock numbers exceeded 64 million head at end 1979 (some 20% of the national herd), an average of 2.6 pigs per commune household. 1.40 Grain production in the region was some 46 million tons in 1979, an average of 327 kg per capita, which is significantly below the national average of 393 kg per head of rural population. Due to a reduction in cultivated hectarage in the Red Basin area and limited prospects for improved yields elsewhere, grain production has grown rather slowly over the past several years (though more rapidly under the 1977-79 period of reform, which has had a big impact in Sichuan). With further irrigation development in the Red Basin area, plus much improved fertilizer availability in recent years due to the opening of two large urea plants, future growth prospects are more favorable, especially if the conversion of prime farmland to industrial and residential uses can be checked. 1.41 Income differences are marked in the highly diversified conditions found in the region. Thus in the favored Red Basin areas, the per capita DCI approaches Y 90, to which must be added private income of Y 50-60. In the extensive uplands and mountains, the DCI is probably under Y 50 for many production teams. C. An International Perspective of Chinese Agriculture 1.42 China's important contributions to the world agricultural economy are indicated by its large share in the production of several major commodi- ties. China produces more than 10% of the world's annual output of rice, wheat, corn, sorghum, soybean, cotton, groundnuts, rapeseed, and tea, and - 19 - accounts for more than 25% of the world's tuber crops. With some 17% of world grain production in recent years, China's annual grain output of 269 million tons (average for 1977-79) is only fractionally below that of the USA (with an average production 279 million tons)./l China is the world leader in rice production by a considerable margin with more than three times the annual output of India, the world's second largest producer. Among the developing countries, China is the most, or second most, important producer for many of the major annual crops. Tables 1.2 and 1.3 show details for some major crops in a comparative framework. 1.43 China's extensive rangelands support a large population of ruminant livestock, including the world's largest goat population (some 70 million stock), plus a sheep population (100 million) second only to Australia's. But the main emphasis is given to pigs, and with stock numbers exceeding 300 million head in recent years, China accounts for some 40% of the world pig population. 1.44 Table 1.2 indicates that crop yields in China in recent years are typically 30-70% above average world levels, considerably exceed the levels found in the developing countries (with soybean the only exception), but are generally some 30-50% below the levels found in the developed countries. Chinese crop yields generally compare favorably with those of other large producers; most exceptions, as Table 1.4 shows, are with reference to the USA and a few other developed countries. 1.45 with regard to cereals as a whole, only yields in the USA (with its massive corn crop comprising some two thirds of the country's grain production) and France significantly exceed the average 2.65 tons/ha yield now obtained in China. In certain respects, for example farm size and labor intensity, cereal agriculture in Western Europe is a better comparator than the USA; however, the considerable subsidies afforded to European crop agriculture permit high technical standards and crop inputs - a factor also true of rice cultivation in Japan. Recent Trends in Agricultural Growth 1.46 Table 1.2, together with Table 1.3, also shows the growth of production for a variety of products. Estimates of trend growth in China are susceptible to considerable variation, depending on the choice of base years for the calculation. In particular, after 1958 a sharp decline in crop output occurred (for reasons discussed in Chapter 3), with recovery only by 1964. Thus growth from the 1950s to the late 1970s is considerably slower than growth from the 1960s. Two sets of estimates are shown in the tables, based on 1957 and 1970 data; detailed information for years prior to 1976 is only available for 1952, 1957, 1965 and 1970. For cereals, aggregate production in China has grown at about the same rate as elsewhere, clearly a /1 These data are based on true grains; Chinese crop statistics often include tubers at grain equivalent weight and soybeans. - 20 - Table 1.2: PRODUCTION, YIELDS AND TREND GROW: SELECTED CROPS 1977-79 Averages Trend growth Production Yields Production Yield million tons tons/ha --------% p.a.-------- All Cereals /a China 269.1 2.65 2.4 (3.5) 2.8 (3.0) Other countries 1,270 2.03 3.0 2.3 - Developed 807 2.62 3.0 2.7 - Developing 463 1.46 2.8 1.9 Rice (Paddy) China 136.4 3.95 2.2 (2.7) 1.8 (1.9) Other countries 242 2.25 2.5 1.5 - Developed 27 5.54 1.4 1.0 - Developing 215 2.10 2.5 1.7 Wheat China 52.5 1.82 3.9 (7.6) 3.6 (5.9) Other countries 370 1.85 3.2 2.7 - Developed 279 2.08 2.9 2.9 - Developing 91 1.39 4.1 2.4 Corn China 55.1 2.76 4.6 (6.6) 3.1 (3.5) Other countries 335 3.12 3.7 2.5 - Developed 255 5.09 4.0 3.2 - Developing 80 1.39 2.8 1.2 Sorghum China 7.8 2.26 0.1 (-1.5) 3.3 (3.7) Other countries 57 1.33 3.2 2.5 - Developed 22 3.37 2.7 1.5 - Developing 35 0.95 3.6 2.8 Soybean China 7.4 1.05 -1.5 (-2.1) 1.4 (-0.5) Other countries 72 1.85 8.2 1.7 - Developed 55 2.02 6.9 1.8 - Developing 16 1.42 18.0/a 4.3 Cotton (lint) China 2.14 0.45 1.3 (-0.7) 2.2 (-0.2) Other countries 11.5 0.41 1.2 1.3 - Developed 6.0 0.68 0.9 1.1 - Developing 5.6 0.28 1.4 1.3 Groundnuts China 2.39 1.29 -0.3 (1.3) 1.2 (0.3) Other countries 15.9 0.96 1.0 0.9 - Developed 2.2 2.42 3.4 3.9 - Developing 13.8 0.88 0.7 0.6 Rapeseed China 1.81 0.71 3.5 (8.3) 3.0 (0.9) Other countries 8.0 0.98 6.1 2.8 - Developed 5.7 1.48 9.0 0.4 - Developing 2.2 0.53 1.9 1.3 /a FAQ definition, excluding soybeans and tubers. /b Mainly Brazil and Argentina. Sources: Official estimates for China; FAO estimates for other countries taken from FA0 Production Yearbooks of 1979 and earlier years. Note: For countries other than Chiae, the trend comperison is between an average of 1977-79 and 1961-65 data. For Chia, the comparison is between data for 1977-79 and data for 1957, with the data in brackets showing a more recent trend, based on 1970 data. - 21 - Table 1.3: OTHER OUTPUT INDICATORS Trend growth of 1977-79 production/livestock Average numbers Tea (-000 tons) China 265.8 4.2 (8.7) Other countries 1,498 3.3 Sugarcane (million tons) China 20.1 3.2 (5.1) Other countries 715 3.2 Raw Silk ('000 tons) China 23.8 6.1 (8.8) Other countries 32.3 1.3 Tuber Crops (million tons) China 149.8 2.7 (1.5) Other countries 428 0.8 Pigs (million head) China 304 3.6 (5.0) Other countries 440 1.8 Sheep (million head) China 98 3.0 (n.a.) Other countries 973 0.2 Goats (million head) China 74 2.4 (n.a.) Other countries 563 3.7 Cattle (million head) China 53 0.3 (n.a.) Other countries 1,148 1.4 Buffalo (million head) China 18 1.5 (n.a.) Other countries 101 1.2 Note: Sources and methods as for Table 1.2. - 22 - Table 1.4: SELECTED CROP YIELD COMPARISONS: CHINA AND HIGH-YIELD, LARGE-SCALE PRODUCERS (1977-79 averages, tons/ha) Other large-scale producers China USA Japan Canada France USSR Brazil Rice 3.95 6.28 Wheat 1.82 2.16 4.68 Corn 2.76 6.29 5.22 Sorghum 2.26 3.65 Soybean 1.05 2.07 1.45 Cotton (lint) 0.45 0.55 0.91 Groundnuts 1.29 2.88 Rapeseed 0.71 1.94 Source: As for Table 1.2. result of declining cropped area, since yields have risen faster. Fast growth in yields reflects in part the predominance in China of rice, wheat and corn, which together have accounted for over 90% of total cereal production in recent years. All three crops have benefited from the development of new fertilizer-responsive plant varieties, and the growth of wheat and corn yields in China, as in the world as a whole, has been particularly rapid. The comparison of production and yield increases also shows a growth in hectarage for these crops, especially for corn, in China accounting for about one third of the production increase (the corn area has increased by some 5 million ha since 1965). 1.47 A major difference between the experience of China and that of many other developing countries relates to the availability of new arable land, either from land development or increased multiple cropping (the latter usually due to irrigation). In China, probably since 1965, the reported cropped hectarage has been roughly constant following a substantial decline between 1957 and 1965. The main explanation is probably that new land available through irrigation or land development in the border areas was offset by losses to increased residential and industrial uses in the more highly developed zones, the latter frequently being double cropped land./l In contrast, among the other developing countries (considered as a group) additional hectarage or an increase in the cropping intensity continues to make a significant (albeit declining) contribution to production growth, accounting for one third of the total increase in the case of cereals, for example. /1 The sharp decline from 1957 to 1965 may also reflect some other factors that are discussed in Chapter 3. - 23 - 1.48 Faced with an increasing food requirement (largely reflecting rapid growth of population), China has allocated land to permit a continuing strong growth of the major cereals. However, for other cereals such as millet and sorghum, and for other competing field crops, especially soybean, the cropped hectarage has declined considerably (for these three crops alone, by more than 13 million ha since 1957). In consequence, production growth of these secondary crops is generally below that experienced elsewhere, either in the developed or developing countries (and was actually negative for soybean). Competition with cereals for scarce arable land is also a partial explanation for China's comparatively weak performance in certain other field crops, notably cotton and groundnuts. 1.49 Crops that do not usually compete with foodgrains in land use, including tea, mulberry (for silk production) and tuberous rootcrops, show a strong growth performance in China relative to the rest of the world (in these instances, mainly comprising other developing countries). This is also generally true of livestock, especially of pigs./l Meat production in China (dominated by pork) has increased rapidly in recent years, with higher feed- grain allocations and improved producer incentives. Thus meat production increased by about 16% p.a. in 1977-80, versus 3.4% p.a. in 1957-77. The Resource Base for Agricultural Development 1.50 Intense and increasing pressure on a narrow arable land base is a major element in the interpretation of China's agricultural experience since 1949. Indeed, despite the country's vast area of about 9.6 million sq km, only about 10% (99.5 million ha) is arable land available for sustained cropping. Thus China has one of the world's highest man/arable land ratios, at roughly 10 persons per ha in terms of total population and about 8 persons per ha in terms of agricultural population. The ratio of agricultural population to arable land in India is less than half as high as in China; and in the USA in some respects the most similar large country in terms of climate patterns and variations - the equivalent ratio is 300 times less than in China. 1.51 Of necessity therefore, China's arable land is intensively farmed, typically with very high inputs of labor (and correspondingly high standards of crop husbandry), extensive use of chemical and organic fertilizers, and considerable development of irrigation and drainage to regulate water supply and extend multiple cropping possibilities. About 45% of China's arable land is irrigated (more than double the proportion for other developing countries taken together), i.e. roughly one quarter of the world's total /1 Cattle are mainly raised for draft power in China rather than for meat, and the near stagnation of the cattle population reflects the substi- tution of mechanical power (tractors) over considerable areas of northern China. Buffalos have maintained their importance in the south, where conditions are much less suitable for mechanized field operations. - 24 - irrigated land. China's application of chemical fertilizer per arable ha now exceeds 125 kg, more than three times the average for other developing countries and approaching the average of developed countries; adding the vast annual applications of organic materials and manures would raise China-s average to levels found almost nowhere else in the world./1 1.52 Intensive land use, associated with organic manuring, irrigation and high labor availability, is of long standing in China. Nevertheless, much development is of recent origin (i.e., initiated during the period of the People's Republic) and reflects the substantial efforts made to promote agricultural growth. Only fragmentary and approximate indicators are available to illustrate these efforts in a comparative framework. Data relating to chemical fertilizer, irrigation and mechanization are shown in Table 1.5. They indicate a generally faster rate of increase in China than in other developing countries, especially for mechanization (where in all probability the data understate the differences because pedestrian tractors, of major importance in China, are excluded from the data base). For chemical fertilizer, the recent increase has been especially rapid, with application rates doubling from about 64 kg/ha in 1977 to 128 kg/ha in 1980. Food Supplies and Population Gfbwth 1.53 Food balance sheets and food consumption (measured by calories and protein intake) are not yet available for China. However, rough estimates of per capita food availability for some of the major items can be made, includ- ing foodgrains, vegetable oils, fruits, meat and fish products. The data for 1979 indicate a per capita gross calorie availability of about 2,400 and protein intake of about 60 gm, with about 92% of energy supplies coming from vegetable products./2 Food availability has improved sharply, by about 15%, in the past two to three years; there was little improvement between 1957 and 1977. Corresponding data suggest that the average per capita food intake in China is generally comparable to, or above, that found in other low-income countries. 1.54 Two significant features characterize the food situation in China. First, a system of food security - based on nationwide state procurement, food rationing in the urban areas, and a well-developed crop production reporting system - assures that at least basic requirements are met in all localities and a measure of equity is maintained in local sharing arrangements. Second, this system has worked with only very modest additions to domestically /1 In terms of cropped area, however, China-s chemical fertilizer application rate would be reduced considerably in relation to that of the developing countries, as China's double- or triple-cropped area is relatively large (the aggregate cropping index is about 150%). This does not affect the growth rate comparison though, as the cropped area in China has been about constant (para. 1.47). /2 See Annex H (Population, Health and Nutrition), Tables A.28-A.30. - 25 - produced food supplies; net imports have probably never exceeded 5% of domestic production. In effect, surpluses are built up in favorable years, then used to maintain basic supplies during poor years. This is feasible both because of generally well-maintained and carefully controlled storage systems (though facilities are perhaps now becoming inadequate), and because the development of flood protection and irrigation facilities limits crop damage, even with exceptionally poor weather, to relatively small amounts, measured against nationwide production. Table 1.5: COMPARATIVE INDICATORS OF RESOURCE INPUTS IN AGRICULTURE 1978 Recent trend increase levels % p.a. Chemical fertilizer (nutrient basis), kg per arable ha: China 90 (11) Total other countries 70 6 - Developed 110 5 - Developing 25 9 Tractor mechanization, arable ha per tractor: China 180 (15) Total other countries 65 3 - Developed 40 3 - Developing 270 7 Irrigated land, share in total arable land: China 45% (3) Total other countries 12% 2 - Developed 8% 2 - Developing 17% 2 Note: For countries other than China, the trend increase is from an average of data for 1961-65 to 1978. For China the trend increase is based on estimates of 1965 data compared with 1978 data. Sources: China, rough estimates based on data supplied to the mission; other countries, FAO data. - 26 - 2. BASIC POLICIES AND THE INSTITUTIONAL FRAMEWORK 2.01 When the People's Republic was founded in 1949, the agricultural economy was suffering from severe dislocations associated with decades of warfare and civil disturbance. Destruction and deterioration of economic infrastructure were widespread; the institutional framework for production, marketing and technical services was in disarray. During the 1950s, despite limited capital and technical resources, major reconstruction and massive changes in the institutional framework were accomplished, which effected a radical transformation of the economic and social environment in both rural and urban areas. By the early 1960s, the Government had achieved its basic goal of establishing a society and economy functioning according to socialist principles, as well as an institutional framework that was maintained thereafter, with comparatively minor changes. 2.02 This chapter describes the major policies and institutions affect- ing agricultural development and summarizes their evolution since 1949. First the agrarian reforms of the 1950s and early 1960s are described, then the three-level commune system (Section B) and the state farm sector (Section C). Socialist marketing institutions and price policies are dealt with in Section D, which also includes a discussion of the rapidly expanding credit system. An outline of the complex and multi-layer structure of administration and functional responsibilities relating to agriculture is contained in Section E, together with a discussion of agricultural planning. The final section of the chapter deals with technical supporting services to agricul- ture, including research, extension and agricultural education. A. Agrarian Reform Land Reform 2.03 The first phase of agrarian reform, which focused mainly on the redistribution of agricultural land and political power, was completed by early 1953. The data in Table 2.1 provide a rough indication of the impact of the reform; both the pre- and post-reform data are based on sample surveys, almost certainly using different sampling procedures./l Moreover, the /1 The 1930s data are based on the studies by J. L. Buck, "Land Utilization in China" (Nanking University, 1937). Post-reform data are derived from surveys carried out by the Central Statistical Bureau in 1954, as reported in Peter Schran, The Development of Chinese Agriculture, University of Illinois Press, 1969. - 27 - post-reform data include the formerly landless among the poor peasant bene- ficiary class, while the 1930s data exclude families that were landless at that time. Thus the average size of holding was reported at 4 acres for the 1930s, of which 2.85 acres were cultivated, and at 2.44 acres of cultivated land after land reform. The 15% difference in the cultivated area may be due to the population increase over 20 years, to sample error and bias, and to the inclusion of the landless in the later data. Table 2.1: IMPACT OF LAND REFORM Distribution Average extent Distribution of households of land (acres)/a of households I Pre-land reform Post-land reform data of 1929-33 I data of 1954 Small farmers 58.7 1.2 1 2.0 57.1 Poor Peasants Medium farmers 29.8 3.2 I 3.1 35.8 Middle Peasants Large farmers 7.7 6.7 1 4.3 3.6 Rich Peasants Landlords 3.6 30.0/bi 2.0 2.6 Landlords I - 0.9 Others /a Pre-reform data calculated in ownership equivalent units, on the assumption that rented cultivated land returned 50% to the landlord and 50% to the tenant. Pre-reform, each farm category rented land equivalent to 30-33% of owned land. After reform, renting on the part of poor and middle peasants was of marginal importance (less than 3%). /b Owned land. 2.04 Taking the population increase into account, the situation of the poor and middle peasants in the immediate pre-reform period was almost surely worse than suggested by the 1930s data, so that the impact of the land reform was probably greater than the data in Table 2.1 indicate. In an economic sense, it seems clear that the reform's major effects - positive and negative - were largely felt at the top and the bottom of the pre-reform income classes, that is among the 5-10% of the population at the upper income levels and among the lowest 60%, who had most to gain (and who indeed gained most). In a social or political sense, the wealth and power base of the landlord/rich peasant class were totally destroyed by the reform, and with them the old leadership class in rural society. The class labels "landlord" and "rich peasant" as they were then applied have continued - 28 - to exert considerable influence in rural society; very few members of these classes, or their children, have subsequently taken up leadership roles in the rural society of modern China. 2.05 How this leadership was replaced is one of the most striking aspects of China's agrarian reform. A basic factor was the deliberate and very considerable efforts that were made to promote leadership from within the ranks of the poor peasantry, both before and during land reform. Operating under centrally provided guidelines, and with the help of special land reform teams brought in from the outside, the peasantry was organized into village committees and assemblies to carry through the reform. With the help of the cadres, the village itself carried out a census of land- holdings and ownership, interpreted and imposed class labels, and expropri- ated and reallocated the assets of previous owners. Through this process, which often took six to nine months to complete, new peasant leaders could test and prove their abilities along various fronts: the capacity to organize and energize a community and to command the necessary respect among a peer group; the energy and judgment to persist in implementing a difficult program; and the intellectual capacity to grasp essential principles (such leaders were often illiterate). This also required a commitment to take up the considerable burdens of rural leadership without recompense and while maintaining a livelihood as a full-time farmer. The generation of new leadership created in part by the land reform movement has served China well during these first decades of development and social change. And a local leadership cadre that is drawn from the peasant class - but not drawn away from it - is an advantage that relatively few countries enjoy. Agricultural Cooperatives 2.06 The land reform effected a major transfer of assets and income from the rich to the poor and, together with peace and stability, contri- buted to recovery and rapid growth of agricultural production in the early 1950s. But the initial land reform made little impression on what was probably a substantial cause of inefficiency, namely the fragmentation of cultivation across numerous tiny parcels of land - the result of centuries of inheritance, subdivision, and purchase and sale of small lots. Moreover, the assets to be redistributed included important quantities of tools, equipment and draft animals, whose efficient use was problematic at the level of the 2-3 acre holding of the newly enfranchised poor peasant. The land reform campaign was therefore quickly followed by vigorous attempts to promote agricultural cooperatives./1 Initially, these efforts focused on creating mutual aid teams, a concept that drew in part on a long-standing /1 Here and in subsequent discussion of policy, the text mostly confines itself to economic considerations. In fact, politics and ideology were also major factors. For example, many leading Party members supported and promoted cooperative development from fear of a re-emergence of a rural propertied class (if private ownership of land were retained), rather than for economic reasons. - 29 - tradition among kinfolk in China (some village communities were made up almost entirely of blood relatives) and on experience gained in the first communist enclaves established in Jiangxi in the early 1930s, and later in Shaanxi. 2.07 Cooperation in the mutual aid team (generally made up of 5-15 households) varied from a simple exchange of labor to the common use of tools and draft animals, with rental payments to their owner-participants. In the more progressive areas, mutual aid teams evolved rapidly into formal Agricultural Producer Cooperatives (APCs), whose participants pooled their land resources and were paid according to work inputs and to land and tools contributed. By the mid-1950s, a very few cooperatives had reached the so-called Advanced Agricultural Producer Cooperative stage, under which land (together with major tools and draft animals) was pooled and became the property of the collective. The former owners were compensated by installment payments over three to five years. In advanced cooperatives, earnings were based exclusively on labor input under a workday system (with distributions made on the basis of an annual accounting) after deduction of input costs, taxes, reserve funds, etc. Individual households generally retained the use of - or were allocated - a small private plot for vegetables and sideline activities, and they retained their small livestock, including pigs and poultry. 2.08 Progress in cooperative development is shown in Table 2.2. After a buildup of both the mutual aid teams and primary cooperatives before 1954, a considerable acceleration in the formation of the latter took place in 1955. This was followed by a radical transformation to advanced cooperative status in 1956, by which time virtually the entire agricultural sector was organized along socialist lines. Table 2.2: DEVELOPMENT OF AGRICULTURAL COOPERATIVES, 1950-56 Total number of Households agricultural in mutual Households in APCs (2) + (3) households aid teams Primary Advanced as % of (1) ---------------------(millions)-------------------- (1) (2) (3) 1950 105.70 11.31 - - 10.7% 1951 109.38 21.00 - - 19.2% 1952 113.55 45.36 0.06 - 40.0% 1953 116.23 45.64 0.27 - 39.5% 1954 117.40 68.48 2.29 0.01 60.3% 1955 119.12 60.39 16.88 0.04 64.9% 1956 122.36 - 10.41 107.42 96.3% Source: State Statistical Bureau, Ten Great Years (Beijing, 1960). - 30 - 2.09 The dramatic acceleration of the program in 1956 indicated by these data imply that close to 30% of all rural households, involving about 37 mil- lion families, shifted from post-land reform peasant proprietorship to joint production socialist agriculture in a single year - a manifestation of the authority of the leadership and the grassroots organization that had been built in the countryside in the brief period since 1949. The Advanced Agri- cultural Producer Cooperatives (as established by the end of 1956) incorpo- rated the basic principles of group farming (pooling of land resources and joint ownership of major assets) and payment according to labor contribution that have remained the distinctive features of Chinese socialist agriculture in the countryside to the present day. B. The People's Commune Development of the System 2.10 The progression through mutual aid team and simple cooperative to advanced cooperative was marked by a sizeable increase in the scale of organization. Allowing for considerable local variation,/l a typical mutual aid team might have 8-10 member families, a simple cooperative 20-25 member families, and an advanced cooperative 150-200 member families. The latter could thus embrace a large village or a collection of smaller settlements. Increasing the size of organization involved achieving a balance between conflicting considerations. On the one hand, farmer confidence and trust tended to favor smaller, highly localized groups, while on the other hand, exploitation of scale economies - especially for the acquisition and use of farm machinery and for land improvement works and other projects - argued for larger institutions. Moreover, a larger scale could also facilitate the development of rural services that necessarily depended on outside inputs and trained cadres, as well as on better linkage with higher political and administrative levels in government. 2.11 The latter arguments were adjudged sufficiently persuasive /2 to launch another major initiative whereby, in 1958, some 740,000 advanced cooperatives were merged into 26,000 People's Communes. With an average membership of about 5,000 households, the establishment of communes repre- sented a 30-fold increase in the scale of organization. Although the initial /1 Important factors were the geographic dispersion of population and arable land availability: typically, cooperatives were larger where population densities were higher, and smaller in resource poor areas with widely scattered populations. /2 Again, with reference to an earlier footnote, the decision was vigorously debated by the Party leadership, with a sizeable group in favor of slower progression to advanced socialism. - 31 - outcome was in many respects a considerable disappointment, the experience provided a basis for subsequent reforms in the early 1960s, from which the commune emerged substantially in its present form. 2.12 Several factors - including external factors, such as the very bad weather for agriculture in 1960 and 1961 - helped create the early diffi- culties encountered by the communes. Planning was sketchy, with the result that local cadres were ill equipped and ill prepared to handle their vastly expanded responsibilities. Administrative and accounting systems were worked out by trial and error, with a good deal of improvisation and confusion. Farmers too were poorly prepared for what was - or threatened to be - a quite drastic change from the small, neighborhood-based group farming approach. Under the early commune structure, an attempt was made to shift the distri- bution of surpluses from the small cooperative groups of farm families to the level of the entire commune. This greatly weakened the relationship between individual and team efforts and the income derived therefrom. This link was further weakened in areas where substantial funds were diverted to services such as free meals from communal kitchens, nurseries for children, health care and welfare. An additional production disincentive was the communes' active discouragement or elimination of private plots and the closing of local markets, through which farmers had sold or exchanged their sideline produc- tion. Finally, many of the "Great Leap" programs to promote rural industry based on the transformation of local materials (backyard blast furnaces, cement plants and the like) failed, so that a great deal of the peasants' labor input for capital construction yielded a poor return. 2.13 As the evidence of problems accumulated, the authorities effected a series of corrections, mostly in 1961 and 1962. These changes included the breakup of the original communes into units of a more manageable size (roughly tripling the total number from 24,000 to 74,000), with correspond- ing changes at lower echelons. They also involved the re-establishment of the small production team as the basic unit for farm planning and as the accounting unit for the distribution of collective income. Many commune services were scaled down or abolished, the right to cultivate private plots was restored, and rural markets were reopened. In sum, the system resulting from these adjustments was akin to the structure of the Advanced Agricul- tural Producer Cooperatives of the 1956-58 era, but with the addition of the commune itself as a higher level planning and coordinating body linked to the overall administrative structure. This revised system was codified in the Work Regulations for Rural People's Communes of 1962 (known as the 60 Articles), most of which are still in force today. 2.14 A subsequent period of consolidation and recovery was again checked by further upheaval associated initially with the Cultural Revolution, which began in 1966/67, and thereafter with continuing disturbance during what the authorities now describe as the "ten years of turmoil," which lasted until 1976. With "politics in command," economic criteria during this period - 32 - were accorded a secondary role in commune management. Local initiative was discouraged in favor of strict adherence to central policy directives, though these directives were frequently ill suited to local conditions. Equally important, technical development, including manpower training and agricul- tural research, was largely discontinued and technical criteria and advice ignored in decision making. In the commune itself, private agriculture and sideline activities, together with rural markets, were discouraged or eliminated, and to some extent earnings became based on political criteria, self-assessment and criticism sessions. As in the late 1950s, there were renewed efforts to shift accounting and distribution from the level of the production team to higher levels. 2.15 The results of these policies are examined in Chapter 3. Since the late 1970s, a series of important reforms has restored the situation of the early 1960s. In some respects recent reforms have gone well beyond restoration in a major effort to raise living standards in the rural areas and to increase the agricultural growth rate. The brief account of the commune system that follows incorporates these recent changes. There is still considerable local variation in the extent to which the new policies have been adopted and some prospect of further change during what is still regarded as a period of adjustment. The Production Team 2.16 At the lowest level in the commune structure is the production team, generally made up of 20-50 families (the national average is 34 fami- lies) from one neighborhood or locality and often with strong family ties among its members. At present, there are more than 5 million production teams, comprising some 175 million peasant families or 807 million people. Collective activities are mainly associated with the farming of a holding that on average (with considerable local variation) includes some 15-20 ha of arable land. Other collective activities include team "sidelines," which encompass such activities as piggeries, orchards and herb gardens, apiculture and the collection of wild products. Collective income may also be obtained from team members' employment in brigade and commune enterprises (the latter is described subsequently), and from temporary employment elsewhere, for example in local towns or as construction gangs on infrastructure projects. The team usually owns small tools and other equipment (possibly a pedestrian tractor, threshers and irrigation pumps) and some storage facilities (for grain and fertilizer). Larger machinery is obtained from the production brigade, usually on a service fee basis. The collective activities of the production team are managed by an elected team leader, who is supported by other officials, including work point recorders, team accountants, store- keepers, etc. These officials are all drawn from the team itself and con- tinue to work as members of the team, though work points are also accumu- lated for time spent on official business. In practice, many team leaders have been in post for a considerable number of years. - 33 - 2.17 The team is usually the basic production unit,/1 with responsi- bility for farm planning and execution. Farm surpluses (after various deductions) accrue as income to the team and are distributed annually, though advances can be obtained at various times of the year. This income includes cash obtained by marketing the crop surplus and income in kind for household consumption. Gross output and the various deductions are processed through a set of team production and appropriation accounts. Of total gross output (sales plus retained production), costs of purchased inputs currently average about 32% (more in richer teams that hire machinery and utilize greater quantities of purchased inputs). Of the balance, some 50% is distributed as collective income to team members. The residual, about 18%, represents collective withholdings, including taxes, cash and grain reserves, and a small welfare fund./2 Cash and grain reserves are used, inter alia, as seed, feed and cash for working capital; emergency relief in case of natural disaster; and a fund for team investments and contributions to investments by brigades or the commune. Cash and grain available for fixed investments and improve- ments are quite limited, however, especially among the poorer teams, and labor contributions have been by far the most important resource for capital construction at the team level. The decisions on allocations are made by the team but are subject to any guidelines issued by the commune or the county, and, in more general terms, by the provincial or central government. 2.18 Distributed collective income (cash and grain) is allocated to individual household heads within the team according to household accumu- lations of work points and manure contributions to team agriculture from household animal husbandry (pigs), and through use of a basic per capita grain /1 In a few cases, less than 5% of the total, the production brigade is the basic unit for production and accounting. /2 Some indication of the evolution of these shares is provided by data collected by the mission for Hunan: 1957 1965 1970 1975 1979 Production costs (20) 25.4 30.4 33.2 31.9 Taxes (9) 7.2 5.4 4.5 3.5 Accumulation funds (5) 8.2 5.9 9.4 8.7 Distributed to members (66) 59.1 58.3 53.0 55.9 Total (100) 100.0 100.0 100.0 100.0 - 34 - allocation./1 This allocation helps to ensure availability of basic necessities according to need, but is less important now than at some earlier times when egalitarian distribution was heavily favored. Nevertheless, in the poorest teams, providing basic necessities may still absorb virtually all team income, and in most teams two thirds of grain, or more, is distributed under the basic ration allocation. 2.19 Work points are based on criteria that conform to guidelines but allow some latitude for team decisions. Most work point systems appear to be based on time/rate assessments, with skill and other quality differentials. Many teams combine the basic system with task-related and piecework elements during certain seasons; a few base most activities on piecework systems. The assessments may be revised at periodic meetings of the team, for example, when a new crop is introduced into the farm plan or a new team-operated sideline enterprise is established, or in response to policy directives. 2.20 An aspect of considerable and increasing importance following the recent reforms is the use of contractual arrangements within the team itself. Various types of arrangements may be entered into. A commonly used approach is for a small group of workers within the team to make a contract involving, say, cash crop production, under which an output target and a work point and material input allocation are agreed with the team. The contract specifies how the proceeds from any above-target production will be shared between the group and the team, together with financial penalties for failure to meet the targets./2 This approach seems to be particularly popular in upland and agriculturally diverse areas, which have a pattern of mixed cropping on small and scattered arable areas. In some cases, contractual arrangements have been extended to include most agricultural activities, and the contract may be with individual households./3 2.21 Work points can also be accumulated through participation in activities managed at the production, brigade, or commune level (or sometimes in state enterprises and urban employment), or through assistance on rural infrastructure or other improvement projects, the benefits from which do not accrue directly to the worker's team. In these cases, the appropriate body (brigade, commune) will transfer the value of work done to the team's account, with the work point accumulations of individual members set by the team. Here too, some evolution in the arrangements is apparent. In particular, for areas that have begun to specialize on a large scale in /1 Distributed collective income as reported by the State Statistical Bureau (cf. Table 1.1) does not include manure payments. However, the payments for manure (possibly averaging as much as Y 7-8 per capita nationally) are made from collective resources and are part of the collective accounting system. /2 Sometimes called the "3 responsibilities - 1 reward" system. /3 A recent report suggests that contracts with individual households are now widely used in areas accounting for some 20% of China's peasant households. - 35 - brigade- and commune-run enterprises, the tendency is now to pay cash wages to workers, with some supplementary payments being made to the workers' teams from enterprise profits. 2.22 Household accumulations of work points (plus credit for manure contributions) will usually suffice to finance the basic grain apportionment, plus providing supplementary grain and cash income. Where this is not the case, for example, if a household has few working members or illness has reduced the work input, debts may be accumulated with the team./l Under special circumstances, for example, in households where elderly folk have no sons to provide for them, grants may be made from team welfare funds (public benefit funds)./2 Frequently though, a team will arrange for these families to do some light work so that grants are supplementary and limited in amount. Crop failure may reduce available food supplies below acceptable levels for teams, communes or whole localities. In these cases, relief grain is provided (usually on a loan basis) under the food security system managed by the Food Ministry (para. 2.41). 2.23 Once individual and household obligations for the team's collective activities are met, a good deal of the remaining time is devoted to the house- hold plot and private sideline activities, including handicrafts and animal husbandry. These activities generate important supplements to distributed collective income, estimated at some 30% of total agricultural income at the national level,/3 and provide the main source of cash income in the peasant economy. 2.24 The household plots and private sidelines provide vegetables, eggs and some meat for household consumption, and, depending on market conditions /1 Deficit households may also pay for grain directly, from savings or proceeds from private agriculture and sideline activities; see paras. 2.23-2.25. /2 The public benefit fund is replenished through a special category of collective withholdings on the team appropriation account, with maximum rates set at about 3% of distributed income. Other uses include subsidies for education fees or health charges for poor families and team expenses on special occasions. /3 A 1979 commune income/expenditure survey (reported in the People's Daily of January 3, 1981) showed total per capita income at Y 160, of which some Y 102 was derived from the collective economy, Y 44 was household private income and Y 14 came from other sources, including remittances. These data compare with Y 83.4 obtained from commune accounts as per capita collective distributed income in 1979. Both the survey and the accounts data value income received in kind at 1978 prices. "Collective income" in the survey includes manure credits and cash wages, both of which are excluded from the accounts data. The survey data are thought to be upward biased, but probably not to any great extent. - 36 - and access, offer opportunities for cash earnings through sales at local markets and to state agencies. Under the 60 Articles of 1962, private plots were limited to 5-7% of a team's arable land, although new, uncultivated land (which might be available in upland areas) could be opened on a private basis (to revert to collective use after 3-5 years), and private use of roadsides (e.g. for mulberry trees and bamboo) and designated fodder areas was also permitted. These arrangements still generally apply, but the limit is now 15% for private plots. Some provinces have also allowed households increased access to collective land on a temporary basis./1 It is also the practice in some areas for the private plot land to be managed collectively (especially where the land is used for grain production), with various sharing arrangements of the proceeds between the household and collectively organized labor (e.g. 60:40, 50:50, etc). 2.25 The range of household sideline activities, mostly undertaken by female members of the household, is large and includes such traditional craft skills as hat making, basket weaving, knitting, tailoring and pottery; the main restriction is that no extra household employment or hiring of labor is permitted. Many small, collectively managed enterprises also specialize in such activities. The Production Brigade 2.26 This is the middle tier in the commune structure, coming between the team at the base and the commune administrative center. The brigade tends to encompass either one large village or several smaller ones, with considerable local and regional variation. In 1980, there were some 699,000 production brigades, with 7-8 teams per brigade on average, although some brigades involve as many as 12 teams and others as few as 3 teams. Basically, the brigade provides a coordinating mechanism for activities that require several teams to act together, for example, labor-intensive farmland construc- tion and brigade-managed enterprises. The brigade may organize specialized teams, for example, a construction team that works on maintenance and farmland improvement or, if opportunities exist, on contract work (e.g. housing and office construction in nearby urban areas). The brigade is the location for basic social services, e.g. primary education and health posts manned by paramedics. The brigade is also the lowest level at which the Party is organized. 2.27 The brigade enterprise subsector has been growing rapidly in recent years and involves diverse activities, for example, brick works, oil presses, silk manufacturing concerns, repair stations for agricultural machinery, /1 The survey data (para. 2.23) also report the average availability of private plots at 0.15 mu per capita (15 mu = 1 hectare). If the sample is representative, this implies that about 8% of total arable land (8 million ha) is in private plots. Privately managed land (including land available to households on a temporary basis) was similarly reported at 0.18 mu per capita, i.e. roughly 10% of all arable land. - 37 - orchards, tea farms, and other specialized agricultural and livestock enter- prises. In the more prosperous areas, a brigade may handle as many as 15-20 such activities, and much recent investment has been generated through retained surpluses of the older brigade enterprises, rather than new direct savings from the accumulation funds of the teams. But the brigade enterprise subsector is scarcely developed in the more remote areas. In national terms there is an average of less than two enterprises per brigade, with average employment per enterprise of some 14 workers. Many enterprises close for one to two months during the year, at peak periods in the agricultural calendar. Commune Services 2.28 Currently there are some 53,000 communes, roughly 25 per county (or "banner" in the autonomous regions), each serving an average of 12-13 produc- tion brigades. Thus the average population of a commune is some 15,000 people (but varying between 5,000 and 50,000), with arable land resources averaging about 1,800 ha. Management staff at this level are linked to higher level units at the county and provincial levels, and unlike brigade and production team officials, many receive salaries paid out of provincial budgets./l In the more prosperous areas, the administrative center is usually located in a small rural township that offers a variety of higher level services - secon- dary education, a small hospital with professional medical care, tradesmen and craft specialist workers, transportation, credit and marketing facilities. 2.29 Staff at this level serve two major functions: the leadership and direction of commune activities as a whole, and the dissemination and monitor- ing of the impact of policies and program directives from higher authorities. As at lower and higher levels of administration, the Party structure works in tandem with the administrative structure, with the Party in overall command. Commune staff include: a commune manager or director; senior officials for finance, administration and civil affairs; and, typically, functional specia- lists for agriculture, water conservancy, industry and commerce, education and health, and military affairs. Senior staff form a commune management commit- tee. Many higher level staff also double as commune Party officials, and the commune manager often also serves as the Party secretary. This system is now under review as part of the adjustment and reform process. It is possible in the future that commune production related management and technical staff will be strengthened, while administrative and political matters will increasingly be dealt with from the county level. 2.30 General administrative duties include the collection of taxes, maintaining public security, collecting data and writing official reports, registering births and deaths, and performing marriage ceremonies. Many local services are controlled from the commune level, including education, /1 On average, each commune had roughly 20 state employees in 1979. - 38 - health, marketing and communications. Most communes operate a wired broad- cast system. Programs received from provincial radio stations, supplemented with locally produced news, weather and entertainment, are broadcast through loudspeakers at brigade and team centers and can be picked up by many household radios. Marketing services coordinated by the commune include the activities of the state-run supply and distribution cooperatives and grain procurement services. The commune may enter into specific supply contracts with the cooperative supply agencies and with other entities (for example, to purchase manure from a local municipality or to sell cash crops to an industrial enterprise). The commune is also the base from which various agro-technical services operate, including extension and adaptive research. 2.31 In much the same way as the brigades, the communes promote and manage commune enterprises, which are on a bigger scale (averaging over 40 workers per enterprise in 1979) and include such activities as tractor service pools, chemical and cement plants, machine shops, canneries, paper manufacturing concerns, small-scale hydroelectric plants, and consumer goods industries. Commune-run enterprise is often linked with state or urban collective enterprise, with contracts for supplying components, making up textiles into piece goods and clothing, etc. In 1979, each commune had an average of six such enterprises, again with a considerable variation in the degree of development, depending on local factors./1 Workers in commune enterprises are typically paid a monthly wage and work on a year round basis. In general, production activities are mostly funded from commune sources, but there is increasing use of credit and some amount of grant finance, from the county and province, for such purposes as infrastructure improvements, flood control and irrigation work. Grant financing is particularly important in the poorer areas, where brigade and commune industry is, thus far, little developed and agricultural productivity is low. C. State Farms 2.32 The state farm sector constitutes a small but significant element in the agricultural framework and is quite distinct from the People-s Commune. As the name suggests, the state farm is in many ways akin to state-owned industrial enterprise. In particular, its workers are wage-paid state /1 Commune- and brigade-managed enterprises accounted for about one quarter of total commune gross output nationally. But over 50% originated in five eastern seaboard provinces, plus the rural suburbs of Beijing, Tianjin and Shanghai municipalities. In these areas, enterprises account for over 40% of output, versus under 20% in the rest of the country. - 39 - employees, and (until recently) any profits were returned to the state and investment capital allocated to the farm by the state./l In practice, only in 1979 was a small profit reported from the state farms, although some farms were making profits in earlier years. This was probably due to the sizeable industrial subsector rather than to agriculture pe se. 2.33 The first state farms were established in the 1950s, mostly as pioneer settlements in border areas, with ex-army personnel making up most of the labor force. A major expansion occurred between 1957 and 1965, when the cultivated area increased from about 1 million ha to over 3 million ha, and an additional 1 million ha has been added since 1970. State farms continue to be concentrated in border areas, and the element of land development and reclamation is still an important part of future development programs. In the 1970s, a good many of the urban school leavers that were sent to the countryside were assigned to work on state farms. 2.34 Currently, state farm lands comprise some 30 million ha, of which some 4.5 million ha are arable lands under cultivation - equivalent to 4.5% of the nation's total cultivated area. With 2,047 farms in operation, the average cultivated area is some 2,200 ha, rather more than the area available to the average commune, where the average population (workers and dependants) is three times as large. Over half of the cultivated area, some 2.4 million ha, is located in the northeast (mainly Heilongjiang) and is mostly used for large, machine-intensive grain and rootcrop farming; the average size of a state farm in Heilongjiang exceeds 20,000 ha. Xinjiang, in the extreme northwest, is another major base area, with about 1 million ha cultivated or an average of about 3,000 ha per farm. Other important areas include certain reclaimed coastal lands of Jiangsu and Hebei in northern China, and areas in the south where plantation rubber and sugarcane are the main crops. At present virtually all of China's natural rubber production comes from the state farm sector. 2.35 In recent years, management emphasis has begun to shift from pioneer settlement/land development towards increased productivity and profitability. This is linked to increasing the contribution of the state farms to marketed surplus (foodgrains and cash crops) for urban/industrial consumption. Cur- rently about 35% of grain production from state farms is sold to the state, almost twice the marketing rate of the communes. It is planned to raise this to about 45% by 1985 and, with increased production, to increase total mar- keted grain from state farms by about 6 million tons. Another recent /1 Under new arrangements, state farm profits will be retained for reinvestment up to 1985. - 40 - development has been a substantial expansion of state farm industrial enterprises: in 1979 these contributed some Y 3.3 billion to gross output, compared with Y 4.4 billion from farming activities. 2.36 Under the leadership of the Ministry of State Farms and Land Reclamation, the farms operate in a more or less self-contained fashion. On-farm services include health care, education and other social amenities, plus technical services and management by cadres trained in ministry- supervised colleges and secondary technical schools. Some 10.9 million workers and dependents are resident on state farms. The average per capita income, largely wage paid, was Y 255 in 1979, about three times the nation- wide average for the communes. The farms are highly mechanized, with 85% of the cultivated area machine plowed, 50% machine harvested and 76% machine threshed. On the other hand, only 34% of the area is irrigated (versus about 48% for commune lands) and the "high and stable yield" area is estimated at only 8%. Reflecting in part the cold winters characteristic of the border areas, the aggregate cropping index is only 106%. D. Marketing, Pricing and Credit in Agriculture 2.37 Together with agrarian reform and the establishment of producer cooperatives, the authorities also introduced socialist principles in pricing and marketing for agriculture during the 1950s. Price controls on major commodities were first used in 1949 as part of the effort to deal with the serious inflation of the period immediately prior to 1949. Thereafter the range and scope of private marketing was progressively restricted as official supply and marketing channels were developed. By the mid-1950s, schemes of unified or planned purchase were in operation. For the major crops - so-called "Category I" crops: grains, oilseeds, cotton and sugar - purchase and subsequent distribution were increasingly limited to state- managed procurement agencies, which used centrally determined prices. These agencies were also charged with collecting the agricultural tax, which was (and is) paid in kind, mainly as grain. A range of cash crops and livestock products was similarly designated as "Category II" crops, with production quotas sold to marketing cooperatives, and production in excess of the quotas sold in free markets and to the cooperatives. Prices for most of these crops were also set nationally, with some provincial variation. Finally, a residual category, consisting mostly of minor crops, vegetables and other products of household rather than collective enterprise, continued to be disposed of through rural markets at prices regulated either by the province or the county. 2.38 The marketing and pricing system established in the 1950s has been broadly maintained, although the importance and scope of rural and other free markets have varied over time with changing policies (described in Section B above). The two most important marketing agencies for agriculture, both - 41 - under state management, are the Ministry of Food, which procures and distri- butes grain and oilseed crops, and the All China Federation of Supply and Marketing Cooperatives (S & M Federation), a specialized agency that is also directly subordinate to the State Council. The S & M Federation purchases most cash crops, and it distributes some agricultural inputs and tools, as well as consumer goods, in the rural areas. Some products (including sugar, pigs for slaughter and rubber) are purchased by specialized branches of the Ministry of Commerce. Grain Marketing 2.39 The Ministry of Food procures grain in large volumes (about 50 mil- lion tons p.a.), in recent years. These data are reported in husked grain; in terms of paddy they imply a total procurement of close to 60 million tons, or some 18-20% of total foodgrain output./l Procurement is based on plan targets, with grain quotas assigned to production units a feature of the system since the mid-1950s, when they were based on assessments of land productivity and local foodgrain requirements. Quotas in most areas are fixed at levels that are well below the availability of grain surpluses (in some areas the quotas have not changed since the 1950s), so that quota purchases account for only about 45-55% of total grain procurement. In 1979, quota purchases amounted to about 25 million tons of grain, with the balance coming from tax grain (10 million tons) and above-quota purchases, the latter negotiated with the production teams on an annual basis. Purchases are made at two prices, depending on whether the transaction is a quota grain sale or an above-quota sale, for which there is a 50% price premium./2 Like quota purchases of grain, tax grain collections are also made on the basis of tax assessments that remain fixed for long periods of time. The tax burden, in relation to total agricultural output or grain output, is thus much lower than it was in the mid-1950s./3 /1 In very recent years another 10-12 million tons of grain (mainly wheat and corn) were imported, but these imports were partly offset by exports of 1-2 million tons of rice. /2 In 1979, some 3-4 million tons were also purchased by the Ministry of Food at so-called negotiated prices, which vary by locality and are set, in effect, by conditions in local free markets for grain (see para. 2.43). Negotiated prices are generally well above quota prices. /3 In 1979/80 (the grain marketing year runs from April to March), the agricultural tax collected in kind was about 10 million tons, equivalent to some Y 3.2 billion on the basis of average procurement prices. This excludes some 2.4 million tons of tax grain that was remitted in low- income areas, a practice likely to be followed in future years. Taxes on commune- and brigade-run enterprises (Y 2.2 billion in 1979) seem likely to overtake agricultural taxes as a source of revenue in the next few years. - 42 - 2.40 The Food Ministry is organized at central, provincial, prefecture and county levels throughout the country, with the basic unit in the country- side being a grain management station that serves one or more communes. The total staff at all levels exceeds 2 million workers, excluding seasonal workers. The ministry owns and operates substantial milling and storage capacity and some road transportation equipment, although most road transport is handled on a fee basis by local transportation companies of the Ministry of Transport. 2.41 The major emphasis in foodgrain policy has been to assure adequate supplies throughout the country at stable and uniform prices. In the urban areas, grain (and edible oil) is allocated via a rationing system. Grain rations vary with locality, being higher in the north than in the south. Thus, in the south, average per capita rations of processed grain are about 16 kg per month, with varying allowances by age and type of activity (e.g. mine workers 25 kg per month, office workers 13.5 kg per month, primary school age groups 12 kg per month)./l The edible oil ration is 1/4 kg per person per month, with an additional 1/10 kg sometimes available. In the rural areas, supplies are much more variable, depending mainly on an area's level of agricultural development and to some extent on the supply-demand balance in the province. In general, the authorities maintain a floor consumption level (unprocessed grain) of 200 kg per capita per annum in rice producing areas and 150 kg in other areas. After milling, these minima would be roughly equiva- lent to a ration of a little less than 12 kg per capita per month. Procured grain that is distributed in the rural areas is usually sold; such sales are primarily to meet the needs of specialized, nongrain (cash crop) areas, or they are made under special incentive arrangements (e.g. grain sold to producers of pigs sold to the state). Grain distributed in poor areas to meet basic requirements, essentially relief grain, is also usually sold, although it may be financed through loans that are often rolled over from year to year. Some relief is provided to individual households as grants through the social welfare system. Nationwide, the average grain distribution to commune members from collective sources was about 245 kg per capita in 1979, equivalent to roughly 200 kg in terms of processed grain, i.e. about 17 kg per capita per month. Adding state grain sales in rural areas, plus production of grain from private plots, raises the overall rural average to about 20 kg per month. The communes themselves retain about 20% of total grain output for seed, feed, industrial uses and general reserves, some of which is also used to supplement consumption directly. /1 Free market purchases, at higher prices, can be used to supplement ration grain. Of total grain distributed through the state marketing system, about 75% is for urban areas, about 90% of which represents ration grain. Most of the grain redistributed in rural areas is absorbed under various incentive schemes and as ration grain in cash crop areas. In 1979, some 3 million tons was distributed as relief grain. - 43 - 2.42 Consumer foodgrain prices have been maintained at stable levels, while procurement prices for producers have been substantially raised - including an increase of some 22% in 1979, when quota prices were increased by over 20% and the above-quota sales premium was increased from 30% to 50%./1 The increasing gap between purchase and selling prices involves the state in providing heavy subsidies to the Food Ministry. In aggregate, the subsidy for foodgrains is about Y 10 billion, i.e. Y 200 per ton procured and processed. 2.43 In 1978, restrictions were lifted on the sale of surplus grain in free markets at negotiated prices. It is estimated that some 5 million tons of grain now enter these markets, often grain of superior quality or of specialized types. The grain is usually sold at prices above (sometimes well above) the price of either procurement or ration grain. Some price regulation in these markets is effected by the local offices of the Food Ministry (Local Food Supply Company), which make purchases and sales from official stocks. Input Supply, Cash Crops and Retail Trade 2.44 The responsibilities of the Food Ministry in the marketing and distribution of foodgrains and oilseeds are complemented by the work of the S & M Federation, a similarly large and complex organization. The S & M Federation has developed from what were originally small, locally based peasant marketing associations. The latter were first established in the 1940s in the then-liberated areas of northern China and later spread to other areas during the 1950s. State participation in ownership and management followed in 1958, effecting a transformation into what is today essentially a state trading corporation with elements of local autonomy. 2.45 Currently the S & M network comprises some 3.6 million workers, plus an additional 600,000 licensed agents who buy and sell on a commission basis. In the countryside, there are some 36,000 separately organized marketing cooperatives which, together with the licensed agents, form a nationwide commercial network. The "below county" or lower level cooperatives are expected to be financially self-sufficient and are permitted to retain 61% of their profits. The "county and above" levels serving the smaller towns and county seats return most of their profit to the state. In 1979, the total volume of retail sales exceeded Y 80 billion, including Y 14 billion of sales /1 In historical terms, consumer prices for foodgrains were increased by about 40% between 1952 and 1966, but have been held constant since then. Procurement prices were increased by about 115% between 1952 and 1980. - 44 - of agrochemicals, equipment and agricultural supplies to the collectives./l The S & M Federation also purchases most of the economic crops produced in the countryside, including cotton, wool, jute and other fibers, silk cocoons, tobacco, fruits, processed vegetables and native products (medicinal herbs, spices, honey, etc.). The total value of purchases was close to Y 16 billion in 1979./2 Some technical services and other support are provided by the S & M Federation to encourage the further development of these crops. 2.46 Like the Food Ministry, the S & M Federation operates within a pricing framework that is governed by state policy and with purchase quotas for some of the leading crops. The policy has been to furnish necessities at stable prices, while agricultural inputs such as fertilizers have been supplied at progressively reduced prices and the prices for agricultural produce purchases have been increased (in particular, special price premia are now paid for above-quota sales of cotton). Many commodities are thus pur- chased or sold at nationally determined and near-uniform prices. Like the Food Ministry, the S & M Federation also receives special subsidies where the allowed distribution margins are too small to cover costs. Prices are locally determined (by the provincial or county authorities) for a range of other items, but the regional variation is also small in many cases. As a result of the recent reforms, many agricultural items now enter local markets or are sold at negotiated prices through contracts between the collective (commune, brigade or team) and outside bodies. Agricultural Credit 2.47 Credit for agricultural development is largely the responsibility of the Agricultural Bank of China, although some credit funds for rural development are also provided by the People's Bank and the Construction Bank. The Agricultural Bank was originally founded in 1955, but was subsequently merged with the People's Bank of China until its reactivation as a separate institution in 1979. After vigorous expansion this year, when 60,000 new staff were hired and others transferred from the People's Bank, the total staff is currently some 230,000. The bank is organized at the provincial, /1 Large equipment such as tractors is distributed by the Agricultural Machinery Supply Companies of the Agricultural Machinery Ministry. /2 Total agricultural and sideline produce purchases of the commercial departments (Food Ministry, S & M Federation, Ministry of Commerce, etc.) over a period of years were as follows (Y billion): 1952 1957 1965 1970 1975 1977 1978 1979 9.0 17.7 27.4 31.4 41.5 41.3 46.0 58.7 - 45 - prefecture and county levels and has some 22,000 branch offices. The work of the bank is complemented by some 59,000 local credit cooperatives, organized at the commune and brigade levels. 2.48 In conjunction with the central and local authorities, the bank exercises general responsibility for the planning and allocation of rural credit and for credit distribution. In addition to communes and state farms, various state agencies (such as the S & M Federation cooperatives and the agricultural machinery companies) can receive credit. The bank also pro- motes, and provides a vehicle for, rural savings as well as other banking services for individual and collective institutions. It supervises the work of the credit cooperatives and provides training both for their staff and for brigade- and commune-level accountants. 2.49 In 1979, the bank's loan portfolio was some Y 45 billion,/l with short-term credit (working capital loans to agricultural enterprises and agencies) accounting for Y 23 billion. The balance comprised production and term credit for the communes and state farms (Y 16.6 billion), plus a small element (financed by credit cooperatives) to individuals (Y 1.1 billion). Loans to communes and state farms are expected to be about 25 billion in 1980, increasing from Y 13 billion in 1978. Interest charges for production credit and working capital are 0.36% per month (4.32% p.a.), agricultural equipment loans are charged at the preferential rate of 2.16% p.a. and most other enterprise loans at 4.32% p.a. A small element in the portfolio is represented by relief loans at zero interest. Bad debts reportedly make up a small fraction of the portfolio (about 10% of loans to communes and brigades), though some loans are in effect rolled over from one year to the next when crops have been badly damaged because of adverse natural conditions. For term loans, the bank will finance up to 100% of equipment costs in some cases, but generally the borrowers will provide 30-40% of the funds themselves. 2.50 In general, the demand for credit at the local level appears to exceed the supply. In fact, the planned allocation to county and lower levels is essentially a rationing process, and the amount of funds available still depends largely on the local savings that can be generated, mostly through the credit cooperatives (para. 2.52). The bank is planning a major expansion in the 1980s and expects to double its loan portfolio by 1985. 2.51 The loan portfolio is financed by individual deposits (checking and savings accounts), which make up some Y 10 billion; checking accounts of collective enterprises and agencies (Y 22 billion); and government equity contributions channeled through the People's Bank of China. Private checking accounts accrue interest at 2.88% p.a. (collective sight accounts /1 These data include loans made by and deposits of the rural credit cooperatives. - 46 - at 1.80%) and various term credit rates are offered, for example, 5.40% p.a. on one-year deposits. This rate became effective in April 1980 (3.90% p.a. was paid formerly); rate increases for loans are under review. The bank estimates that at present direct operating costs account for about 30% of its interest charges. 2.52 The local credit cooperative is an important part of the system and deals with a substantial fraction of the business at the commune level. Most credit cooperatives are self-financing and pay their own staff and adminis- trative expenses, though some receive direct support from the bank. Produc- tion credit and small loans are dealt with by blending local savings and credit made available by the bank on a consolidated basis. In onlending bank funds, the credit cooperative receives a commission from the bank of Y 8 per Y 1,000. Thus the bank is directly involved in the credit operations (Y 10,000 or more) at the commune level, but not the smaller transactions - with substantial savings in operating costs. Management and supervision of the credit cooperatives extend to monthly inspection of the accounts and selection of the manager. Cash is returned to the bank on a daily basis. E. Administration and Planning Administration 2.53 The administrative framework for agricultural development is necessarily complex. It involves responsibilities for what is an extraordi- narily large and multi-dimensional range of activities, which corresponds to the large and varied agricultural, economic and social environments of rural China. A general feature of the system is dual leadership, by which subordinate organizations and agencies are linked both to a parent ministry and to an appropriate level in local government, be it province, prefecture or county. On one side, this system provides for responsiveness to higher levels in policies and policy directives, and it ensures a degree of technical support and quality standards in professional work. On the other side, local planning and control of day-to-day activities and program implementation encourage a measure of local initiative and better coordination between the various branches. The importance of these aspects is underscored by the sheer size of the units involved: for example, the county has an average population of some 400,000 people; and the province in many instances has a population equal to that of a large country (15 provinces have populations in excess of 30 million, including Sichuan with close to 100 million, and Henan and Shandong, each with over 70 million). 2.54 The structures and functional responsibilities in agricultural work are broadly similar at the various levels in government, with increased subdivision and specialization at the higher levels. In the provinces and at - 47 - the center, the work of the key agricultural ministries (or departments at the provincial level) is coordinated by an agricultural commission, whose members are vice-ministers or department heads and other leading officials, and whose work is supported by a small secretariat. At the central level, the State Agricultural Commission deals directly with five ministries and two specialized agencies: the Ministries of Agriculture (which includes animal husbandry), Water Conservancy (flood control, major drainage and irrigation, small-scale hydropower development and domestic water supply), Forestry (separated from Agriculture in 1979), Agricultural Machinery, and State Farms and Land Reclamation; and the General Bureau of Aquatic Products and the Central Meteorological Bureau. In the provinces, some of the corresponding departments may be merged with the agriculture function, depending on the scope of local work. At the prefecture and county levels, staff are usually grouped under an agricultural office, with two or three specialized functional bureaus. 2.55 Other important agencies include those described in Section D above, which cover food, general marketing and agricultural credit, plus some of the industrial ministries responsible for the manufacture of agricultural materials and equipment, and others dealing with transportation, energy and public works./l In many instances, the implementation of state-supported programs is carried out by specialized companies that are affiliated with the various ministries or departments and that sometimes work under contract (e.g. agricultural machinery companies, food supply companies, construction com- panies). Several such companies may be active in a province, some organized and managed at the provincial or county levels, others as national companies affiliated with the central ministries. 2.56 There is also a wide range of specialized research, training and design institutions, again typically attached to a parent ministry or depart- ment responsible for the work program, content of the training courses, etc., of the affiliated institution. For example, at the provincial level, the water conservancy department will usually have a research and design institute to carry out studies and engineering design work for water conservancy projects. Similarly, the agriculture department will supervise a network of agricultural research institutions, including a provincial academy of agricultural science and several subordinate institutes (the latter often specialize in particular crops or soil and land use problems), plus possibly 100 or more research stations at the prefecture or county level./2 /1 The important State Council biogas program is managed by the Ministry of Agriculture. /2 Technical services in agriculture (research, training and extension) are described in more detail in Section F below. - 48 - Agricultural Planning 2.57 Detailed and comprehensive planning is undertaken at all levels of government and is a central feature of the Chinese socialist system. However, five-year plans have usually been interrupted or vitiated by institutional upheaval and major policy change, such as the Great Leap of the late 1950s and the Cultural Revolution. The past two to three years are described as a period of adjustment, experimentation, and reform with the introduction of a wide range of new policies designed to give new impetus to economic growth, modernization, and improved living standards. This period is now drawing to a close and greater stability is expected during the 1980s, when - effectively for the first time since the mid-1950s - development will again be based on five and ten-year plans. Currently, authorities at all levels are preparing these new plans, semidetailed for 1981-85, and in outline form for the ten years 1981-90. 2.58 Notwithstanding the difficulties of longer term planning, annual plans continue to be central to resource allocation, investment and produc- tion in agriculture. In particular, the allocation of critical inputs to the countryside (such as chemical fertilizer, diesel fuels, agricultural machinery and general credit) is based on the annual plan, with fairly limited scope for deviation once the plan targets are set. The national plan includes crop production targets, and capital construction fund and production input alloca- tions, to the level of the county. Below county planning is done by the communes, brigades and production teams. 2.59 The state-managed marketing and supply system, the control of price setting and the tightly knit organizational structure of the commune (directly linked with higher administration) together constitute a powerful apparatus for agricultural planning. Such a broad array of instruments permits the use of various strategies and combinations of policy approaches. Indicative or indirect planning - which leans heavily on material incentives and pricing adjustments, and accords considerable discretionary power to lower level units - is at one end of the spectrum of policy approaches. At the other is physical planning or planning by directive, whereby detailed physical output and acreage targets are assigned from higher levels to the production units, which then determine investment and working capital allocations./1 2.60 In several respects, the recent policy reforms mark a return to the practice of the 1950s, when indicative or indirect planning was more /1 In general though, agriculture has been less tightly controlled than many other sectors. Surpluses have always been retained by the communes and capital accumulation has depended heavily on retentions plus the contributions of labor from the commune members. Private activities, while severely curtailed in some periods, have usually made a significant contribution to sectoral output and income. - 49 - generally used than during much of the subsequent period. These reforms are consolidated in a policy statement approved by the Fourth Plenary Session of the 11th Central Committee meeting of the Party, dated September 1979. The statement describes some 25 policy principles and recommends 8 key points in agricultural modernization strategy. The current approach encourages local initiative and a diversity of local plans, to make full use of agronomic potential and to develop specialization in line with local comparative advantage. Work incentives and subcontracting are also encouraged, and emphasis is given to the use of credit rather than state-furnished grants for capital construction and machinery acquisition. Output prices have been substantially increased and there is more differentiation to favor upgrading product quality. The private economy is being encouraged, as are commune and brigade-run enterprises; and the fixed obligations to furnish grain, oilseeds and cotton to meet quotas and for taxes have been reduced in relation to production levels. But there is still considerable local variation in the planning process as experimentation and adaptation continue, especially at the below county level. In some (probably most) areas, once arrangements to meet state plan objectives are made, the individual teams decide how best to use available resources and formulate their own plans in the light of their particular conditions. Under these conditions, the relative profitability of the various crops, market and investment opportunities become the most important factors in planning. Elsewhere, the team may still be largely influenced by what in effect are directives from higher authorities (brigade, commune, county, etc.) in determining crop hectarage targets, output and investment targets, etc., so that the scope for local decisions is much more circumscribed. F. Technical Services and Training 2.61 China has a long history of agricultural improvements and attained comparatively high standards in crop husbandry at a very early stage of development. But in modern times, it was not until the republican era of the 1920s and 1930s that official support for service activities began to gain momentum. These early efforts, centered mostly in eastern and southern China, included research at a number of national institutes (mostly around Nanjing), research and training in some 25 national agricultural colleges (4 of which were run by missionaries), and training at about 20 provincial agricultural schools, including some technical institutes. An extension service was begun in 1929 (when a central body for extension was established and regulations promulgated) and was reported to be operating in some 14 provinces in 1946, serving some 485 counties, or about one quarter of the country. By 1949, some 6,000 students had graduated from the agricultural colleges (many of whom, however, did not work in agriculture), and another 8,000-10,000 graduates had received some college or other formal training in agriculture. Possibly as many as 1,000 graduates had pursued advanced studies abroad, some of whom largely made up the core group of high-level agricultural scientists and researchers. - 50 - 2.62 Much of this early effort was disrupted and disorganized during the long period of civil warfare, and many high-level technicians fled to Taiwan with the Nationalist Government in 1949. The 1950s marked a substantial rebuilding phase that included building new facilities throughout the country, staff recruitment, training and expanded agricultural student enrollments, and new organizational structures. This work was reinforced in the late 1950s and early 1960s as experience in agricultural development began to indicate strongly the need for new productivity-augmenting technology in agriculture. But this expansion was severely checked and the trend reversed after 1966 due to the Cultural Revolution. Research and training activities continued at a low ebb through most of the 1970s. Virtually all colleges and schools stopped recruiting during 1966-70 and most were closed. After 1970, enrollments were made with scant regard for formal qualifications or aptitude. The course work during this period gave heavy emphasis to politics and ideology, and after completing their studies, most students returned to their communes. Simi- larly, many of the major research institutes were effectively closed and their senior staff dispersed in the countryside. Thus most basic or fundamental research work slowed or ceased, although a good deal of applied work and extension was undertaken in the countryside. This too was probably less effective than it might have been, given the prevailing policy climate during this period. Since 1977, the authorities have made considerable efforts to restore training and research activities, for instance through the re-estab- lishment of competitive examinations as the basis for college entry and - for the first time since 1949 - exposure to Western agricultural science and teaching through foreign training. However, much remains to be done in rebuilding and strengthening these institutions. Agricultural Research and Extension 2.63 For most agricultural research work,/l the apex organization is the Chinese Academy of Agricultural Sciences (CAAS), a body subordinate to the Ministry of Agriculture, with responsibilities for a network of national research institutes, and for technical oversight and coordination of provin- cial programs. CAAS also organizes joint investigations on important national topics, arranges interchange of experience and summarizes research results. Currently there are some 31 national research institutes, 13 of which are located in Beijing and 18 in the provinces. These institutes focus mainly on applied research. Some are organized according to discipline, e.g. the Crop Breeding and Cultivation Institute and the Plant Protection Institute in Beijing, and others (especially for cash crops) by commodity, such as the Tea Institute of Zhejiang, and the Cotton Institute of Henan. Each province is served by a local research network and has a provincial academy of agriculture as the lead institution. These local networks are substantial and complex in /1 Some basic research (in botany, entomology, soils and fertilizers, etc.) is undertaken in various institutions under the Academy of Science, which reports to the State Council. - 51 - the larger provinces. For example, in Sichuan, the provincial academy coordinates the work of 11 research institutes, mostly with crop-specific responsibilities (tea, cotton, rice, animal husbandry, aquaculture, etc.) but with some organized on a discipline basis. Below the provincial level are some 20 prefecture-level institutes and over 170 county-level establishments (almost one for each county), which have diverse programs of research, demonstration, and extension. In sparsely populated areas, several counties may be served by one such institute. 2.64 Research work at the national and provincial levels is also sponsored and coordinated on a considerable scale by other agriculture-related ministries or specialized agencies (including those responsible for forestry, fisheries, irrigation, agricultural machinery, and state farms), as well as such bodies as the S & M Federation. For example, the Ministry of Water Conservancy is associated with seven such institutes, including the Scientific Research Institute of Water Conservancy and Hydroelectric Power in Beijing, which has some 500 researchers. Similarly, most provinces have an institute of scientific studies for water conservancy, an institute for research on agricultural machinery, plus similar specialized facilities subordinate to other line departments. Nationwide there are some 1,300 large research institutes and facilities (above the prefecture level) that are in some way concerned with agriculture. Nevertheless, national statistics suggest that only about 8% of China's technical and scientific staff are employed in programs directly related to agricultural development. 2.65 The importance of close coordination and interaction between research work and extension activities was recognized early in China, begin- ning in the 1950s. The linkages were further reinforced, especially after the Cultural Revolution, giving rise to what is now described as a "seven- level" scientific network. The national, provincial and prefecture levels, the three higher steps, are concerned mostly with research, and the four lower levels (county, commune, brigade and team) deal mainly with the demonstration and popularization of new technologies and techniques, training and other extension-related activities. Most workers at the commune level and below are locally trained "peasant technicians" (some received low quality college training during the Cultural Revolution). They are organized from the county level into groups of three to five workers to carry out much of the field- level work; efforts are concentrated in designated "base points," usually at the team level, where experiments and demonstrations are conducted. During the 1950s and 1960s, an extensive network of agrotechnical stations was set up to undertake extension and training work, but since much extension was subse- quently shifted to commune and within-commune levels, these centers are now mainly used for in-service training of local officials and cadres, and for short courses of farmer training and seminars./1 /1 The situation varies in each locality. In some areas, the agrotechnical centers manage demonstrations and extension work at the commune level, and in some areas the county-level research stations actually undertake fairly high-level research, rather than research application work. - 52 - 2.66 The contribution of the research and extension networks to agri- cultural development is further discussed in Chapter 3. In general, the network is extensive but the numbers of qualified staff, especially at middle and senior levels, are severely limited, and adequate facilities and equipment are generally lacking. Due to the effects of the Cultural Revolution, there are few qualified scientists under the age of 45. Since China's programs have traditionally been strong in applied research and research relating to varietal improvement and agronomic practices for major food crops, more effort is now being given to strengthening basic research and to building up research in areas that were somewhat neglected in the past. Seed Production 2.67 An effective system has been developed for producing seed especially for cereals. Breeder seeds from colleges, academies, counties or research stations are multiplied by county-managed specialized seed farms. The seed farms are responsible for purification, storage and testing of seeds. Stock seeds produced by these farms are sold to seed companies for the multiplica- tion of certified seeds. Some communes also operate their own seed breeding and multiplication farms. Education and Training 2.68 As noted above, the agricultural education system is still recover- ing from the long period of closure and anti-professional bias after the Cultural Revolution. Thus, the first graduates from the newly re-established college system will not be available before 1982, and a scheme of post- graduate education has only recently been formulated. Currently, there are critical shortages of staff at all levels. Responsibility for the management of agricultural education is vested in both the Ministry of Education and a parent functional department (e.g. agriculture, water conservancy, forestry, agricultural machinery, etc.). The Ministry of Agriculture is responsible for most of the facilities; seven national colleges are under the direct supervision of the Department of Agricultural Education (within the Ministry) and a further 38 institutions are supervised at the provincial level./l 2.69 University education generally involves a four- or five-year degree course and is afforded to successful candidates of the college entrance exami- nations for secondary school leavers. Most of the tertiary-level institutions award (or will award) degrees in general agriculture, with various specializa- tions among some 52 faculties. Some colleges are themselves specialized, for example the five colleges of animal health and veterinary practice and the technical schools for sericulture. Many of these establishments undertake substantial research programs. Some are long established; for example, the South China Agricultural College was founded in 1910. /1 Including nine technical schools that offer three-year postsecondary study programs. - 53 - 2.70 Over the 30-year period since 1949, some 210,000 students were graduated from this system. Total enrollment is currently about 45,000, plus 500 postgraduate students; the faculty staff exceeds 14,000, of which about 1,000 are full professors and assistant professors and a further 6,000 are lecturers. Within the plan period to 1985, it is expected that some 70,000 students will be graduated. Given the very large shortage of staff, they will be readily absorbed as agricultural professionals (teachers and research workers), and as administrators for various agricultural agencies. 2.71 Secondary-level technical education for agriculture is provided through a system of senior secondary schools. In principle, entrants are graduates from the lower secondary level, but in practice they include many older students who have failed the college entrance examination. Many of the graduates from these programs are assigned to positions (as extension workers, junior researchers and administrators) at the county or lower levels. Some 214 schools, supported by the Ministry of Agriculture, have an enrollment of 80,000 students and 9,000 teaching staff. The projected turnout from these schools is 180,000 graduates in the 1981-85 plan period (some 540,000 were graduated during the 30-year period 1949-79). Students at these schools (as well as college-level students) receive free tuition and most also obtain living allowances or accommodation. 2.72 Other ministries also supervise university and secondary-level specialist facilities in essentially similar ways; for example, the Ministry of State Farms and Land Reclamation has 5 college-level establishments and 22 technical secondary schools; the Ministry of Agricultural Machinery has 8 colleges and numerous technical schools. Nationwide, there are some 82 colleges or higher level training institutes and some 470 secondary technical schools that serve agriculture. Virtually all these institutions are also involved in giving short-term courses organized at various levels, mainly training and working seminars for staff and Party officials. The great majority, like the research establishments, lack sophisticated equipment (of types that are not widely manufactured in China, if at all), teaching aids and materials, as well as experienced, middle-level staff. 3. OUTPUT, PRODUCTIVITY AND EARNINGS IN AGRICULTURE SINCE 1952 3.01 The Communist Party came to power in 1949 committed to abolition of the power hierarchy of old China and with high hopes of substantially improving living standards among the masses, including the poor peasantry, by far the most numerous group among the underprivileged. As described in Chapter 2, a vigorous program of land reform was undertaken and a system of cooperative farming (built around the three-tier system of the People's Commune) was created. Redistribution of the land and abolition of land rents were one source of major improvements. This was coupled with the development - 54 - of a food security system, which was to ensure access to minimum food require- ments regardless of ability to pay. Meanwhile access to primary education and health care was progressively improved. But the post-1949 successes them- selves generated formidable challenges. The provision of adequate food sup- plies for all the people reinforced the critical dependence on arable land for cereal cropping. Peace, stability and food security encouraged a rapid growth of population and with it an ever increasing food requirement. The pursuit of industrial development posed additional demands on agriculture for raw materials and industrial crops; and industry was in competition with agriculture for investment resources and manpower for technical development. 3.02 This chapter describes how the various challenges were met, begin- ning with an overview of achievements. Section B places agricultural growth in an economy-wide perspective with reference to food requirements and sup- plies, other outputs and trade. Section C discusses the contribution of tech- nical progress and input supply, including land and land improvement (flood control, irrigation and settlement), and examines questions of intersectoral linkage and investment allocation to agriculture. The impact of increasing the labor supply in agriculture and its relationship to output growth, real earnings and living standards in the rural areas are described in Section D. A. Overview of Agricultural Achievements 3.03 The main highlights of agriculture's performance and achievements can be summarized as a basis for the more detailed discussions that follow. There are perhaps three major achievements. First, Chinese agriculture has sustained (under conditions of virtual self-sufficiency) a population that accounts for about 22% of the world's total with less than 8% of the world's arable land. With some notable exceptions, such as in 1960 and 1961, supply of basic necessities has been maintained while the population increased by some 430 million in the 30-year period since 1949 - an average rate of increase of 2.0% p.a. Provision of the basic necessities, together with the maintenance of a food security system to ensure their availability in times of local or national misfortune, has been a continuing policy preoccupation. No large developing country has done as well as China in this regard. 3.04 Second, while rural underemployment may exist, there is still little or no overt unemployment in rural China today, and the collective agricultural system continues to provide both work and income to a peasant population that increased by about 370 million since 1949. Yet best available data indicate that the total arable area increased by only 2% from 1949 to 1979 and the sown area (a better indicator of land availability, given China's high multiple cropping index) increased by only 5% after 1952. With high population growth in the rural areas (2.0% p.a. from 1949), the man/land ratio sharply worsened. Indeed, the data imply that rural population per arable hectare rose from about 5:1 to 8.5:1 over the whole period. - 55 - 3.05 A third achievement was the carrying out of the above while absorb- ing only a modest share of the nation's total investment resources - perhaps about 20% in more recent years, and certainly less than this in earlier years. In particular, agriculture has typically accounted for only 10-12% of the state capital construction budget /1 (or roughly a quarter of the funds allo- cated for industrial development). In addition it is at least arguable (the data are too limited for a complete analysis) that agriculture contributed significantly to industrial development through unfavorable terms of trade, at least until the mid-1960s. 3.06 These achievements are well understood and appreciated in China. But appreciation is mixed with some disappointment about progress and a sense of missed opportunities with respect to past performance. Two aspects are particularly important. First, while agriculture supplied the economy with its basic food necessities, it did little more than this. Per capita consumption of major items appears to have been higher in 1957 than in 1952, but the following two decades were a period of little change. During these 20 years, agriculture was clearly only just providing for the basic food needs of the economy. As recently as 1972, for example, national per capita grain availability for consumption fell to only 85% of levels attained much earlier. Throughout the period it has been necessary to maintain strict rationing of such items as grains, oils, sugar and cotton cloth. A second point, though this is much more difficult to verify in statistical terms, is a high probabi- lity of little or no physical increase in the per worker net productivity of the agricultural labor force, at least through 1977. Indeed net output (value added at constant prices) per worker probably fell between 1957 and 1977. 3.07 Over the whole period, some overall increase in real consumption per agricultural worker was achieved - of the order of 1.7% p.a. But about half of this was due to improved terms of trade, whereby agricultural procurement prices were increased (particularly in the 1950s, early 1960s and late 1970s) while the prices of industrial products consumed in the rural areas were held constant or declined. Benefits from this mechanism, however, largely depend on the size of any surplus production of the peasant community available for sale to the state. Many poorer areas with a small surplus gained little benefit. Moreover, such areas were, in general, least affected by "green revolution" agricultural technology - improved seeds, irrigation and chemical fertilizer. Thus, the problem of regional income disparities is coupled with the more general problem of raising peasant household living standards. /1 This is the source of funds for large projects. Agriculture's share was actually smaller because hydropower and flood protection works for urban areas are also included in the agricultural investment data. - 56 - B. Agricultural Growth in an Economy-wide Perspective /1 Phases in Agricultural Development 3.08 An analysis that emphasizes the phases in China's agricultural development is appropriate in view of the significant effects on agriculture wrought by the rather abrupt changes in policy since the late 1950s. Such an approach is also dictated by data availability, since there are no continuous series yet available./2 3.09 Data pertaining to the major phases are shown in Table 3.1, which disaggregates agricultural output into subcategories, some of which are based on mission estiruates. A brief discussion of the various phases follows. 1 The Chinese statistical system distinguishes some five categories of agricultural output: crops, animal husbandry, fisheries, forestry and brigade-managed enterprises together with production team sideline activities. Most brigade enterprise and some team sidelines are not agricultural activities in the usual sense of the term, and it seems that many sidelines in the past have evolved to become brigade or commune managed enterprises. The category of brigade managed enterprise seems to have been recognized in the statistical system only after 1970 but grow rapidly thereafter. Team sidelines also include hunting and gathering activities, e.g. of medicinal herbs and natural forest products. In most of the subsequent analysis "agriculture" is defined to exclude brigade enterprises and sidelines. Where these are included, the term "agricul- ture plus sidelines" is used. /2 In general, data reporting systems improved steadily in the 1950s until 1957, but deteriorated subsequently during the Great Leap period when considerable exaggeration seems to have been common in lower level reporting units. After some recovery towards the mid-1960s, the system was virtually dismantled during the Cultural Revolution and many data were destroyed or not collected. The system continued at a low ebb through the early to mid-1970s, and estimates from these years should be treated with considerable reserve. Only in the past two years has a substantial reconstruction of the statistical reporting system been effected, and data for some important aggregates are still largely lacking. Table 3.1: GROWTH RATES OF GROSS AGRICULTURAL OUTPUT, 1952-79 Animal Brigade Cotton & Other husbandry enterprise Agri- Ag + Foodgrain /a oilseeds /a crops /a & fisheries & sidelines culture sidelines ----------- ----------------------------(% p.a.)------------------------------------------ 1952-57 3.3 2.2 8.3 7.2 4.0 4.6 4.5 1957-65 nil} 1.1} 1.8} 3.2} 6.6} 0.9} 1.4} 1965-77 3.1} 1.8/b 0.1} 0.5/b 2.4} 2.2/b 3.41 3.3/b 10.5} 8.9/b 2.9} 2.1/b 3.6} 2.7/b 1977-79 9.3 13.2 2.1 8.7 12.5 8.1 8.8 1952-79 2.6 1.7 3.3 4.4 8.3 3.0 3.5 /a Derived from official estimates of crop output, as follows: average unit values at 1970 prices were obtained from data supplied to the mission for Sichuan province and applied to national physi- cal output data for foodgrain crops, cotton and oilseeds. "Foodgrains" includes soybeans, pulses, and the grain equivalent (one fifth the wet weight) of tubers. It also includes the value of grain by-products. "Other crops" was derived as a residual: it is dominated by vegetables, fruit produc- tion, and various perennial crops. 1979 shares in aggregate agricultural ouput were: foodgrains, 58.9%; cotton and oilseeds, 7.1%; other crops, 12.7%; animal husbandry and fisheries, 17.9%; and forestry, 3.3%. Foodgrains, cotton and oilseeds accounted for 75.1% of gross output in 1952 and 66.0% in 1979. /b 20-year growth rate, 1957-77. Source: Assumptions described above and data supplied to the mission. - 58 - 3.10 First Plan Period, 1952-57. The first task in agriculture following the establishment of the People-s Republic was restoration and recuperation. Recovery was rapid and pre-war levels of agricultural production were attained by about 1952/53. Thereafter a phase of continuing development during the First Five-Year Plan period raised output to record levels. This was based largely on land development and irrigation (mostly through labor-intensive works), plus some more ambitious schemes of flood control, especially on the North China Plain. Much locally supported investment took the form of labor contributions, largely for various types of farmland construction - extensions to the arable area, land levelling, ditch and dike construction and road building. The general pattern was, in fact, not very different from that found elsewhere in the developing world of the 1950s, though the scale of effort - sometimes with individual works involving tens of thousands of peasants - was probably unique. Many of the centrally supported large schemes for irrigation, flood control and hydro- power were initiated with Soviet assistance in design and engineering, usually in association with river basin authorities (e.g. for the Huang He, Chang Jiang, Hai, etc.). Output data suggest that grain production increased some 25 million tons between 1952 and 1957, with 70% of this from additional paddy rice production. The expansion of 4 million ha in paddy rice area (equivalent to over 10 million tons of grain at 1952-57 average yields) was a major factor. The end of this phase of relatively rapid growth was in 1957/58. 3.11 The Great Leap and Recovery, 1957-65. A series of bad years in terms of weather and the disruptions of the attempted Great Leap Forward checked agricultural progress severely. Output does not seem to have recovered to 1957/58 levels until about 1964. The effects were particularly severe on foodgrains and other field crops. The worst year was 1960, when grain production fell below 150 million tons to about three quarters of the 1957 level of production. On the other hand, a major emphasis on the development of rural industry, while costly and wasteful in its early stages, resulted in a rapid growth of "sidelines." This feature has continued during subsequent phases ./l 3.12 The difficulties experienced in 1959-61 prompted a wide-ranging review, which had important consequences for agricultural policy and invest- ment strategy. Thereafter, until the late 1970s, agricultural development strategy followed an input-oriented approach, with increasing reliance on industrial products - chemical fertilizers, equipment and machinery - to spur agricultural output. State investment allocations to agriculture were substantially raised in the 1960s, along with higher allocations to branches of industry that produced agricultural inputs. By the mid- to late-1960s, China's burgeoning industrial sector was able to supply many items important /1 Sidelines accounted for 4.3% of "agriculture plus sidelines" in 1957; by 1979, including the new category of brigade enterprise, the proportion had risen to 15.1%. - 59 - for agricultural modernization, including pumps and engines for irrigation, threshing, small-scale hydropower and other purposes; tractors (in various sizes) and equipment for repair and maintenance facilities; and chemical fertilizer and plant protection materials. The prices of these industrial inputs were reduced considerably, by 30-50% in many cases, to stimulate their use. An Agricultural Bank was set up in 1963 to distribute large volumes of agricultural credit; and procurement prices were substantially raised in 1961/62, on average by close to 30%, partly to encourage higher collective savings for reinvestment. The initial stages of this policy coincided with the beginnings of a stream of new and improved high yield varieties from agricultural research, especially of rice and wheat. The steady expansion in use of "green revolution" technology in China marks a period of sustained progress in food production from about 1965. 3.13 The "Ten Years of Turmoil," 1966-76. Beginning in 1966/67 and last- ing until 1976, the input orientation of agricultural development was further intensified as "physical directive" (para. 2.59) again became the dominant mode in agricultural planning. Thus prices of agricultural outputs and inputs changed relatively little over this decade. Agricultural credit became merely supportive of physical allocations of input supplies,/l which in turn reflec- ted bureaucratic decisions about crop production, land use and cropping pat- terns. Agricultural policies became dominated by political slogans rather than economic considerations, and technical criteria (together with technician training) were neglected. Nevertheless, with provincial grain self-suffi- ciency and "grain first" as dominant themes in policy, foodgrain output appears to have grown at about 3% p.a. through the period 1965-77 (choice of these years is limited by data availability). This was accompanied by a renewed emphasis, beginning in the late 1960s, on rural industry and brigade- and commune-managed activities, which grew in excess of 10% p.a. In contrast, growth of cotton and oilseeds was virtually halted. Animal husbandry continued to show steady growth. 3.14 Overall agricultural growth at some 2.9% p.a. was supported by a substantial increase in use of modern inputs (agricultural machinery, irriga- tion power equipment and chemical fertilizer). There is, however, evidence of sharply rising unit costs of production, and farmer productivity and income were probably little increased. These matters are discussed below. 3.15 The Reform Period, 1977 and Beyond. Under new leadership, policy changes on a broad front have been made since 1977. These have involved improved producer incentives and a balance in local decision making that gives more weight to producers (production teams and brigades) in planning deci- sions. These changes, coupled with a further large increase in the supply of chemical fertilizer, reasonable weather in 1978 and exceptionally good weather /1 The Agricultural Bank was merged into the People's Bank in 1966. - 60 - conditions in 1979, resulted in a major spurt in the growth of a broad array of agricultural outputs. Available data indicate that gross agricultural output grew by 8.5% p.a. over these two years and foodgrain production by 9.3%. Cash crop production (cotton, oilseeds) recovered sharply, and growth of animal husbandry (dominated by pork) was also rapid. Part of the large increase in agricultural output almost certainly represents catching up with underlying growth potential. Since the reforms themselves have not yet fully worked through the system, there may yet be scope for further output increases of this type./1 Agriculture, Population Growth and Trade 3.16 In overall terms, perhaps the most striking impression from the various time series data of agricultural development is the dominant effect of the demographic factor in aggregate agricultural growth. Table 3.2 compares agricultural and population growth and gives the implied per capita increase of agricultural output over various periods. Except for the two most recent years, the per capita increase has clearly been very limited, and was negligible over the 1957-77 20-year period. Table 3.2: GROWTH RATES: AGRICULTURAL PRODUCTION AND POPULATION, 1952-79 Total Agriculture /a population Per capita increase ------------------- (% p.a.) -------------------- 1952-57 4.6 2.4 2.1 1957-77 2.1 1.9 0.2 1977-79 8.1 1.3 6.7 1952-79 3.0 2.0 1.0 /a Excludes brigade enterprise and sidelines (footnote /1, p. 56). Sources: Data from Table 3.1 and population data supplied to the mission. /1 Agricultural output in 1980 was checked by poor weather conditions, so that grain production (318.2 million tons) fell slightly in relation to the record of 1979 crop (332.1 million tons). Nevertheless, a surge in cash crop and meat production helped to raise gross output overall by 2.7%; so that average growth (agriculture plus sidelines) over the 3-year reform period was 6.7% p.a. - 61 - 3.17 The limited improvement in the per capita availability of major food items is confirmed by the production data of Table 3.3. Trade data on a commodity basis are not systematically available for years earlier than 1977, although some estimates for trade in grains have been made. These estimates indicate negligible grain trade prior to 1957 and net imports accounting for about 2% of domestic consumption thereafter, adding about 11 kg to per capita availability in 1979. The increase in net grain imports in the most recent years probably reflects in large part the increased use of domestically pro- duced grain for livestock feed in the rural areas. In terms of consumption shares, sugar and vegetable oils are the most significant imported supplements to domestic consumption, adding about 1.1 and 0.2 kg per capita respectively in 1979. (About one third of tea production is exported.) 3.18 Major agricultural outputs that are not food related include cotton and various fiber crops (silk, jute, etc.), plus wool, timber and forest pro- ducts (natural oils and resins) and rubber. For cotton, the most important crop, per capita availability increased by about 25% from 1952 to 1965, but fell back sharply thereafter to about the 1952 level by 1977/78. Imports of raw cotton added about one quarter to domestic availability in 1979; and cotton is now a sizeable item in total commodity imports. China also imports some timber and rubber. In aggregate, imports and exports of nonfood agricul- tural materials were roughly balanced in 1979./i The share of all farm and sideline products in total commodity exports fell from 40% in 1957 to 23% in 1979. 3.19 Insufficient data were available to allow detailed analysis of trends in food availability, taking separate account of consumption levels and patterns in rural and urban areas. Some recently reported surveys of urban and commune households imply that the difference in nominal and (in all proba- bility) real incomes between rural and urban areas is substantial./2 It is likely, therefore, that urban per capita consumption standards are a good deal higher than those in rural areas. In one of the provinces visited by the mission, per capita meat consumption was reported to be twice as high in the urban areas as in the rural areas. Per capita grain availability among /1 Including cotton yarn and filature silk as agricultural exports, but excluding cotton, wool and silk piece goods and fabrics and carpets. /2 These surveys, conducted by the State Statistical Bureau, consisted of (a) a survey of 10,282 commune households in 23 provinces, municipalities and autonomous regions, reporting 1979 income and expenditure, and (b) a survey of 86,955 urban wage earners' families for the first quarter of 1980. Monthly per capita income among urban wage earners' families was Y 35.8, i.e. Y 429.6 p.a. The average per capita income among commune households in 1979 was reported as Y 160.2, i.e. 37% of the average for urban wage earners' families. - 62 - the noncommune population can be roughly estimated, with plausible assump- tions,/l at the equivalent of about 400 kg (unmilled grain) p.a. The recent survey of commune households reported per capita grain consumption at some 257 kg (unmilled grain) - only two thirds as high. Similarly, urban meat consumption has been reported at 18 kg per capita per annum in 1980; with a national average availability of 12.3 kg, implied rural consumption would be about 10 kg. Table 3.3: FOOD PRODUCTION: KG PER CAPITA PER ANNUM, 1952-80 1952 1957 1965 1970 1977 1979 1980 Grain, unmilled basis /a 234 248 215 232 239 274 260 Meat /b 5.9 6.2 n.a. n.a. 8.3 10.9 12.3 Vegetables /c n.a. (79) n.a. (78) (94) (92) n.a. Oils 3.1 2.7 2.1 1.9 1.7 2.7 3.1 Fish /d 2.9 4.7 n.a. n.a. 5.0 4.4 4.6 Fruit Te 4.3 5.6 n.a. 4.1 6.0 7.2 n.a. Sugar 0.8 1.3 n.a. n.a. 1.8 2.6 2.6 Tea 0.1 0.2 0.1 0.2 0.3 0.3 0.3 Ia Seed, feed, incremental reserves and industrial uses assumed to be 20% of gross production. /b Pork, mutton and beef only. 7-c Estimated from official data of sown area, with yields assumed at 20 tons/ha in 1957, increasing at 1.5% p.a. thereafter. /d Gross weight of catch divided by population. 7-e Gross production divided by population. Sources: Estimated from data supplied to the mission by the State Statistical Bureau and the Ministry of Agriculture. /1 The assumptions used were as follows: with a commune population of 807 million and grain consumption per capita of 257 kg in 1979, total consumption would be some 207 million tons. Total production plus net imports would be about 342 million tons in 1979; seed, feed, reserves and industrial uses might account for about 70 million tons. Hence, grain availability for the noncommune population (164 million) was 65 million tons, i.e. about 400 kg per capita. - 63 - C. Investment in Agriculture: Land Improvement, Input Supply and Technology Overview 3.20 Only limited data are available to describe the quantum of invest- ment in agriculture since 1952 (Table 3.4). "Capital construction" covers state support for fixed capital formation in agriculture and is associated mainly with large-scale projects. These data also include what may be size- able allocations to major hydropower schemes (which were a responsibility of the Ministry of Water Conservancy until 1979) and urban flood protection of limited direct relevance to agriculture. The separate "support to agricul- ture" category includes minor project expenditures (mainly from county and provincial budgets)/l and expenditures on agricultural services such as training, extension and research. The combined total indicates a rising level of state outlay, associated mainly with the increasing size of the overall budget./2 Taxes on agricultural output were roughly constant over the period from the early 1950s. At that time they accounted for a sizeable proportion (about 10%) of total sector value added but subsequently became much less onerous, though in recent years growing taxes on commune and brigade enterprise have begun to modify the declining tendency./3 3.21 Two rough estimates of commune-financed accumulation (fixed and working capital) for 1965 and 1979 indicate a rising trend under this cate- gory of investment. These data include an accounting valuation of labor con- tributions, mainly for farmland capital construction (estimated officially at /1 Projects with state support amounting to less than Y 20,000 (or $14,000) was the criterion in one province visited by the mission. /2 With the prices of machinery, cement and steel tending to fall over time, little or no aggregate price increase is reflected in these trends. /3 Taxes, accumulation and distribution to commune members showed the following pattern in one province visited: 1957 1958 1965 1970 1975 1979 Taxes 11.3 15.2 9.8 7.8 6.7 5.2 Accumulation 6.3 13.9 11.0 8.4 14.0 12.8 Distribution 82.5 71.0 79.3 83.7 79.3 82.0 Total net income 100.0 100.0 100.0 100.0 100.0 100.0 - 64 - Table 3.4: ACCUMULATION AND STATE SUPPORT FOR AGRICULTURE, 1952-79 (Y billion) 1952-57 plan 1975/77 1978/79 average 1957 1965 1970 average average 1. Capital construction funds 0.86 1.09 2.35 n.a. 3.72 5.68 Share of total (7.8% ) (7.9%) (13.7%) (11.5%) (12.1%) 2. Support for agriculture n.a. 0.80 1.73 1.59 4.64 8.36 Of which: Water conservancy /a 0.89 2.08 4.00 Agriculture and animal husbandry 0.46 0.82 1.47 Commune support 0.06 0.20 1.09 1.35 Other 0.32 0.65 1.54 3. Capital construction funds for agriculture- related heavy industry /b 0.15 [0.76J [0.84] [1.871 [2.44] 4. Commune accumulation /c 6.5/d 19.5/d N.B.:- 5. Agricultural taxes 2.66 2.97 2.93 2.90 6. Commune and brigade enterprise taxes 2.23 7. Terms of trade impact on agriculture /e -5.2 -6.1 n.a. 0 +9.9/f /a Total expenditures on water conservancy were Y 2.23 billion (1965), Y 4.57 billion (1957-77 average), and Y 7.36 billion (1978-79 average). /b Data from averages of various plan periods, 1953-57, 1958-62, 1963-65, 1966-70, 1971-75, 1976-78. Data include fertilizer and other agrochemical plant and agricultural machinery plants. /c Includes fixed and working capital, and covers agriculture, brigade and commune enterprise. After-tax commune and brigade enterprise reinvestment from profits (including support to agriculture) was about Y 6 billion in 1978/79. /d Rough estimates based on an official estimate of the share of commune accumulation in total accumulation. /e Data shown reflect the difference between state purchases of agricultural produce at 1970 prices and at current prices, assuming that all agricul- tural sales to the state are used to purchase industrial goods. This assumption may exaggerate the terms of trade effect, since some agricultural sales are subsequently repurchased within agriculture; on the other hand, some sales of agricultural produce to other sectors do not pass through the official marketing channels. /f Average of 1977 and 1979. Sources: 1, 2, 4, 5, 6 - from official data supplied to the mission; 3 - from "The Relations Between Agriculture, Light Industry and Heavy Industry in China" by Yang Jiambai and Li Xuezeng, Social Sciences in China, No. 2, 1980. - 65 - 20% of total commune-financed investment in the late 1970s). Self-financing is a much larger component in total financing than the combined total of state support, which illustrates the importance of self-reliance in agricultural development. 3.22 Financial flows associated with direct taxation on production, and state support of production, is only a part in a much larger framework of intersectoral resource flows. In China, from the early 1950s, the authorities established a pricing structure calculated to generate large profits for state industrial enterprise, the essential objective being to absorb resources sur- plus to basic consumer needs for capital accumulation. Subsequently, without fundamental modification in the basic objective, massive industrial develop- ment and increased productivity in state enterprise enabled an increasing resource flow for new industrial capital accumulation to be self-financed./1 At the same time, it also permitted some reduction in industrial prices and some increase in agricultural prices. The impact of these price changes on financial resource availability within agriculture was considerable. Illus- trative calculations are given in the final row of Table 3.4, on the basis of assumptions described in a footnote. No absolute significance is attached to these data; they measure burden and benefit only relative to 1970 price levels. Nevertheless, the impact of changing terms of trade has clearly been large, enabling real consumption increases (discussed in Section D) as well as higher savings and investment by the communes. 3.23 Physical indicators of a massive increase in the availability of irrigation and flood control facilities, rural electrification, machinery of various types and agrochemicals perhaps provide a clearer indication of the quantum of investment in agriculture than do the somewhat unsatisfactory financial data of Table 3.4. The aggregate data and growth trends described in Chapter 1 (Table 1.5) imply that the investments in agriculture have been large in the international context, comparing China with other developing countries. In effect, while agriculture has not been favored in Chinese investment planning (given its contribution to aggregate national income), the sheer size of total public investment outlays has ensured a substantial flow to agriculture, at least after the 1950s. In addition, the collective system in agriculture has mobilized substantial funds from what were and remain the very moderate incomes of the peasantry, as well as large contributions in labor. 3.24 Thus it is difficult to argue that investment in the past was, in some general sense, inadequate. But Chinese critics of past policies make several important points on this question. Investment priorities for agricul- ture were not always well selected, in part because technical and, particu- larly, economic criteria were largely ignored over long periods. The quanti- tative achievements mask considerable deficiencies, for example, the poor /1 In practice, though, profits were returned to the state budget before subsequent reinvestment in industry. - 66 - quality of some chemical fertilizer and inappropriate types of agricultural machinery (see para. 3.36 below); some of the larger irrigation projects that require continuing subsidies to be viable (e.g. power subsidies for some high- lift pump irrigation systems); and some of the early flood control works that were implemented before proper study and have required substantial redesign later on. With limited incentives and heavy-handed directives from local officials, the potential of collective agriculture has not in the past been fully realized or well developed for want of an environment in which effective farm management could flourish. There was almost certainly a myriad of minor investments that could not be effectively scrutinized by local officials who themselves neither bore the consequences of failure nor enjoyed the fruits of success. A multitude of individually small, but collectively important, opportunities were lost for want of a local farm leadership able to seize and act upon its knowledge of the potential of the local environment. Land Development and Irrigation 3.25 Land Availability. Intense and increasing pressure on a narrow arable land base is a major element in the interpretation of China-s agricul- tural experience since 1949. Official estimates suggest that arable land availability, after increasing in the 1950s, fell thereafter to a level currently reported at 99.5 million ha (Table 3.5). A plausible explanation of post-1965 trends is that land losses (due to growing industrial, residential, infrastructure, hydropower and other requirements) in the already highly developed areas were large enough to offset the limited expansion that occurred in the border zones, primarily the northeast. All the populous provinces visited by the mission explained the decline in their arable land in this way. Land lost would frequently have been double cropped while land gained was mostly single cropped. But this explanation is much less plausible for the apparently large decline between 1957 and 1965./1 Among various explanations of this phenomenon are: (a) that following collectivization and the formation of the communes in 1958, labor was concentrated on the better arable lands and other land was converted to pasture or forestry uses; (b) that much land put under the plough in the 1950s could not in fact sustain continuous cropping and so fell into disuse for arable purposes; and (c) that the figure for arable land in 1957 is exaggerated, because at that time new /l Most increases in land availability were probably due to the development and reclamation work in state farms. Data reported by the Ministry of State Farms are as follows (in million ha): 1952 1957 1965 1970 1979 Arable area 0.4 1.05 3.33 3.29 4.36 Sown area 0.2 0.78 2.64 3.15 4.51 The implied decrease in the sown area on commune and other cultivated land is therefore from about 156 million ha in 1957 to 140 million ha in 1965, increasing thereafter to 144 million ha in 1979. - 67 - land development was an important policy tafget. The steep increase in reported cropped area from 1952 to 1957 and subsequent decline in 1957-65 furnish strong support for the second and/or the third view./l Table 3.5: ESTIMATES OF ARABLE AND SOWN AREA, 1949-79 (million ha) 1949 1952 1957 1965 1970 1973 1979 Arable area 97.8 108 112 103.6 101.1 100 99.5 Sown area n.a. 141 157 143 143.5 149 148.5 Cropping index 130 140 138 142 149 149 Source: Data provided by the Ministry of Agricilture. 3.26 Irrigation and Flood Control./2 Extensive efforts to improve the land base, extend irrigation, drainage and flood prevention systems, and develop new lands were begun in the 1950s and were the main focus of rural investment during that decade. Huge projects for flood control drainage and gravity irrigation involved tens of thousands of peasant workers every dry season on the North China Plain and in other areas. Over the 30-year period, protection from flooding of the major rivers has been improved, in general, to afford protection against a 1 in 20-50 year flood occurrence; flood control standards for the majority of small rivers has also been raised. In total it is estimated by the Ministry of Water Conservancy that some 32 million ha of formerly flood-prone lands are now protected by dikes. The towns, industrial centers and other large settlements are now protected against floods of a 1 in 100-year frequency. 3.27 Over the 30 years.since 1949 some 86,000 reservoirs were con- structed, with a storage capacity estimated at about 400 billion cu m - close to 15% of the water runoff of the entire country. The large reservoirs are used for multiple purposes - flood protection, irrigation and hydropower,/3 /1 State farm data show that of total new land developed between 1952 and 1979, some 16% was subsequently abandoned or put to other uses, including 7% for infrastructure, industrial and commercial purposes. /2 See also Map IBRD 15527R2: Hydrology and Water Conservancy Works (located at the end of Volume II). /3 Hydropower was a responsibility of the Ministry of Water Conservancy until 1979; this ministry still deals with small hydropower plants (of 70 kW each, on average). Around 90,000 such plants had been constructed with a capacity of 6,340 MW at the end of 1979, or as much as 40% of total hydropower capacity in the country. The smaller plants (40 kW) are built by the communes themselves, on a loan basis. Some 1,000 such systems have been built in each of the last two years. - 68 - while medium-sized and small facilities are usually constructed for irri- gation. Some 320 large reservoirs (those with a storage capacity exceeding 100 million cu m) have been built, plus some 2,200 of medium size (with a capacity of 10-100 million cu m) and more than 80,000 small facilities./l During the period, a capacity to undertake major works of a sophisticated type was developed. The largest reservoir is Danjiang Kan, on the Hanshui, a tributary of the Chang Jiang, with 20.8 billion cu m. A few large dams have a height exceeding 100 m, with a maximum of 146 m for the Liujiaxia dam, on the Huang He. These units will be surpassed by the 200 m high Three Gorges dam planned for the Chang Jiang, for which storage will exceed 70 billion cu m. 3.28 Total irrigation development is now estimated at some 45 million ha versus about 16 million ha in 1949. This represents some 45% of the total arable area, a proportion that contrasts with an estimated 17% for other developing countries. As much as 30 million ha are irrigated by pumping,/2 which reflects the very rapid development of groundwater reserves during the past 20 years. Some 11 million ha are irrigated by 2.1 million tubewells, 80% of them in northern China. The Chang Jiang basin is the largest irrigated catchment area, with 14.9 million ha. This can be compared with 7.4 million ha in the Huai basin, around 6 million ha in the Hai and 4.3 million ha in the Huang He catchment. Some 3 million ha are irrigated in the Sichuan basin area. 3.29 With major investments in water conservancy, China's grain produc- tion has become progressively less subject to year-to-year fluctuation due to weather. Negative deviation from one year to the next has probably not exceeded 7% of the total harvest since the disasters of the early 1960s. In 1980, for example, with serious floods and drought, aggregate grain production was within 5% of the record 1979 crop. 3.30 The enormous effort implied by the development of over 29 million ha since 1949 (about 1 million ha p.a.) would not have been possible without the massive involvement of the local populace organized by the collective insti- tutions. The extensive participation of the rural population in construction and repair of facilities has often been described. Except for large dams built on major rivers or extensive dredging, almost all water conservancy work in China is done by hand, using wheelbarrows, small carts and often shoulder poles and baskets for transportation. Projects with tens of thousands of workers are common. On average, as many as 50-80 million participants are engaged on winter/spring construction campaigns, with a maximum of 110 million in 1973/74 when some 6 billion cu m of earth were reportedly moved. /1 All but about 700 of the total are earthfill dams. /2 Data on irrigation power equipment, measured in HP units, are shown in Table 3.7. About half the pumps are now powered by electricity. - 69 - 3.31 The financial contribution of the communes and brigades is also of major importance. For the large schemes (generally larger than 20,000 ha or reservoirs larger than 100 million cu m) financing from the capital construc- tion budget covers 100% of the costs of headworks, main and branch canals and structures. All tertiaries, structures, field ditches, land levelling, etc., are undertaken by the communes and brigades using local financing and labor./l Medium and smaller schemes (700 ha to 20,000 ha) or reservoirs (10-100 million cu m) are also funded from the state capital construction budget, but labor payments are lower than for larger schemes. Funds needed for small schemes are usually raised by the communes themselves, but some material equipment costs are also partially subsidized by the state. State subsidies are larger in amount in poor areas. In aggregate, evaluated at standard wages, possibly 40% of all water conservancy work in China has been financed by the local communities (which also undertake subsequent maintenance and operation of tertiaries, field ditches, minor control structures, etc.). It was reported that state expenditure for water conservancy has amounted to some Y 77 billion ($52 billion) since 1949, i.e. close to Y 2.5 billion p.a., clearly the largest single element included under agricultural investment. 3.32 Problems in Land Development. Major problems in land development are erosion, siltation and salinity. Erosion control is mainly attempted by terracing and afforestation, but huge and sparsely populated areas, as well as adverse natural conditions, have limited the effectiveness of the work in the main problem area, the loess plateau of central north China. Reported failure rates are high in afforestation work, mainly because young trees need watering over several years before they are well established. Total replanted areas are often four or five times the size of the area in which trees are successfully established. In some areas serious erosion problems are caused by removal of the vegetative cover to meet fuelwood needs and feed. With continuing massive silting (an age-old problem of the Huang He) some of the newer reservoirs are filling at a rapid rate; the Sanmenxia dam has lost about 5 billion cu m of storage capacity in this way. On the North China Plain, continuous silting also requires that the dike structures (for flood protection) be progressively raised, but drainage presents increasingly difficult problems in the neighboring areas as the river beds are elevated above the surrounding flood plains. 3.33 Poor drainage also contributes to the salinity problems that affect possibly 15% of the total irrigated area, i.e. some 7 million ha. Some secondary salinization seems to have occurred in the North China Plain as a result of the poorly designed water management systems developed during the /1 Workers accumulate work points against the annual distribution and usually receive a supplementary grain ration as a daily allowance. /2 These payments, once agreed between the local authorities and the par- ticipating communes and brigades, are paid over to the latter; workers actually accumulate work points plus additional ration grain. - 70 - late 1950s (associated with the Great Leap Forward). At that time irriga- tion was largely developed without drains, using the relatively salty (0.2-0.5 gm/liter) water of the Huang He. Drainage is also important in the northeast and northwest where substantial areas suitable for irrigation have saline soils. Vigorous efforts are now ongoing to tackle these problems. Manufactured Inputs 3.34 Some perspective on the increased use of manufactured inputs in agriculture is provided by Tables 3.6 and 3.7, which show farm-level stocks of various types of machinery and the production of chemical fertilizer and plant protection chemicals. The acceleration in use over time implied by these data is particularly striking for some of the leading items such as tractors and nitrogenous fertilizer. Thus fully 50% of the 1980 stock of large tractors has been added since 1976 and over 50% in the case of small tractors. Similarly, the production of nitrogenous fertilizer in 1980 was more than twice what it was in 1976. Quite possibly, as much nitrogenous chemical fertilizer was made available over the four years 1977-80 as in the preceding 27 years since liberation. The recent increase is largely attributable to some 13 large capacity (each of 300,000 tons per year) urea plants, which were commissioned in the early 1970s and which are now reported to be working at, or near, their rated capacity. Most of these plants are located in southern China and serve the rice-growing areas./l 3.35 While the growth in use of manufactured inputs is quantitatively impressive, technology change on this scale and at this speed has given rise to several problems. The availability of nitrogen (N) has greatly increased relative to the other major nutrients, phosphorus (P) and potassium (K). Lacking an adequate local resource base for increasing the production of P and K fertilizers, and with limited imports, there is a considerable unsatisfied demand especially for phosphatic and, in some areas, potassic, fertilizer. Studies based on soil analysis show that phosphate may now be the limiting factor in increasing crop yields in some of the more advanced areas of southern China, where use of chemical N is heavy. A second problem is the major use of low-grade ammonium bicarbonate, a fertilizer produced in small coal-based plants on a wide scale in China and still accounting for about half /1 The use of organic manures is also reported to have increased, the latter associated particularly with the considerable growth of the pig popu- lation. Amounts of organic fertilizer available for crop production were estimated at some 1,209 million tons in 1957 and 1,572 million tons in 1965; the amount for 1979 probably exceeded 2,500 million tons. These data imply average application rates of about 25 tons per arable hectare. The usable nutrient content of this material is conjectural, but at 1% of the gross weight could be as high as 250 kg per ha - still considerably greater than supplies from chemical fertilizer. Table 3.6: MAJOR AGRICULTURAL MACHINERY, 1952-80 1952 1957 1965 1970 1973 1976 1977 1978 1979 1980 Tractors (no.) 1,300 14,700 72,600 125,500 234,100 397,000 467,000 557,400 666,800 745,000 Of which: Owned by state farms 1,200 4,800 18,700 24,300 35,000 42,200 43,500 46,200 50,800 n.a. Hand-tractors (no.) n.a. n.a. 39,600 78,800 302,200 825,000 1,090,000 1,373,000 1,671,000 1,874,000 Of which: Owned by state farms n.a. n.a. 5,900 n.a. 8,700 16,600 14,900 21,300 25,500 n.a. Power-driven drainage and irrigation machines (mln HP) 0.1 0.6 n.a. n.a. n.a. n.a. 60.0 65.6 71.2 74.6 Combine harvesters (no.) 300 1,800 6,700 8,000 9,200 14,200 15,700 19,000 23,000 n.a. Of which: Owned by state farms 300 1,400 5,400 6,000 8,000 10,600 11,900 13,700 14,800 n.a. Threshers (no. min) n.a. n.a. 0.11 0.5 1.0 1.8 1.9 2.1 2.3 n.a. processing machines (no. m1n) n.a. n.a. 0.2 0.9 1.7 2.4 2.5 2.7 2.9 n.a. Paddy seeding machines (no.) n.a. n.a. n.a. n.a. 11,100 52,700 71,500 88,100 92,600 n.a. Machine-plowed area (mln ha) 0.1 2.6 15.6 18.2 26.5 34.9 38.4 40.7 42.2 41.0 Of which: In state farms n.a. n.a. n.a. n.a. n.a. 3.3 3.4 3.5 3.7 n.a. Source: Data supplied to the mission by the Ministry of Agricultural Machinery and the State Statistical Bureau. - 72 - Table 3.7: PRODUCTION OF AGROCHEMICALS, 1952-80 (million tons, gross weight) 1952 1957 1965 1970 1973 1976 1977 1978 1979 1980 Nitrogen 0.19 0.61 4.94 7.25 14.27 18.18 26.24 36.37 42.00 Urea 8.35 11.61 Ammonium bicarbonate -------------------- n.a 2 -------------------- 17.29 20.37 Other 10.73 10.02 Phosphate 0.12 3.82 5.04 9.96 10.29 9.49 5.70 10.09 Potassium n.a. 0.00 0.02 0.03 0.04 0.08 0.08 0.06 Total /a 0.19 0.73 8.76 12.31 24.26 28.51 35.81 42.15 52.15 n.a. Total (nutrient content) 0.04 0.15 ---------- n.a4 --------- 7.24 8.69 10.65 12.32 Total (kg per arable ha, nutrient content) -------------------n.a.---------------- 64 89 109 128 Total (pesti- cides) 0.002 0.065 0.193 0.321 0.454 0.389 0.458 0.533 0.524 0.537 /a Considerable and increasing quantities of chemical fertilizer have also been imported, e.g. 1976 - 4.59 million tons, 1977 - 6.40 million tons, 1978 - 7.33 million tons, 1979 - 8.40 million tons. Source: Data supplied to the mission by the Ministry of Agriculture and the State Statistical Bureau. - 73 - of total nitrogen output. Ammonium bicarbonate is highly volatile; as much as half the nutrient can be lost in transportation and in application, and so does not become available for plant growth./1 A third problem has been the tendency to encourage some farming communities to apply more chemical ferti- lizer than is warranted by the economic response application level. In the past, technicians tended to recommend usage rates calculated to maximize crop yields, and this inevitably leads to overapplication. Thus in some areas it was claimed that fertilizer use may fall in future, because under the new policies giving production teams more decision making powers, economic considerations are receiving greater attention in crop technology. Never- theless, aggregate production and use continued to grow rapidly in 1980, by 15.7% compared with 1979. 3.36 Some problems with regard to agricultural machinery are essentially the same as those described for chemical fertilizer. In particular, much of the machinery available over the 1970s was of indifferent quality or inade- quate design. Some was provided to communes on a grant basis. During most of the 1960s and 1970s when the authorities emphasized local self-sufficiency, numerous tractor plants and other equipment facilities were established; but those plants varied in quality, reflecting differences in locally available engineering skills and know-how of the work force. In some areas, production from these plants could more or less be forced onto sometimes unwilling commune purchasers, while in other areas (especially where local plants were turning out high quality products) machinery might be in short supply. With greater emphasis on the use of credit for machinery acquisition and more local level autonomy in purchasing decisions, production of tractors fell sharply in 1980: by 22% for medium and large tractors and 32% for pedestrian tractors. 3.37 A series of questions about mechanization in agriculture and its potential for displacing labor in the rural areas are now attracting consid- erable interest among Chinese scholars and agricultural planners./2 Studies of the impact of tractor mechanization on crop yields and cropping intensities would be of particular interest. Its impact is probably important in areas where there is a special premium on rapid and timely land preparation and /1 Efforts to reduce this problem are focused on (a) pelletizing the product at the manufacturing stage, and (b) advisory work to ensure application of bicarbonate as a basal dressing. Some of the more inef- ficient manufacturing plants have been closed and planned large-scale production of ammonia urea may reduce bicarbonate usage in the future. /2 Such mechanization covers a considerably wider field than tractor mechanization alone. While aggregate indices of mechanization are still quite low for a number of field operations in China (sowing 10%, har- vesting 3% and transplanting [rice] 1%), significant savings are asso- ciated, for example, with the wider use of mechanical threshers. - 74 - harvesting, for example in parts of north and northwestern China that have short and variable growing seasons. In eastern China, mechanization is stimulated by labor scarcity due to double and triple cropping in agriculture, plus a very substantial development of brigade and commune enterprise. Else- where, however, these effects of mechanization may have seemed unlikely to be of major importance, and in aggregate, more mechanization may have been under- taken than would be justified by economic considerations alone./l This was almost certainly true during earlier periods when machinery was made available to production units on very attractive terms. Under collective agriculture, the consequences of excessive mechanization are economic rather than social, since labor displaced by machines is assigned to other tasks, albeit often of a low productivity. Its major impact is therefore on the costs of production. 3.38 Very possibly, however, the bulk of the more recent massive increases in the farm-level stock of tractors is in fact essentially an investment in transportation. In some areas, the use of tractors for haulage (associated with 0.5-1.0 ton capacity trailers) is reported to account for 80-90% of total tractor operating time. The area plowed per tractor also seems to have fallen drastically. Comparing the relevant rows of Table 3.7 (with four pedestrian tractors treated as equivalent to one medium-sized or large wheeled tractor), the apparent fall indicated is from about 190 ha in 1965 to about 60 ha by 1976 and to 34 ha by 1980. These data undoubtedly exaggerate the decline of plowed area per tractor because tractors were increasingly used in double-cropped areas of southern and eastern China, while land data relate to arable rather than to cropped area. Even so some considerable decline must have occurred./2 Estimates of traffic flow in rural areas are not available to gauge the changing aggregate requirement for short-haul, commune-based transportation. Much of the traffic associated with official purchases and deliveries of produce is undertaken by agency-owned vehicles or vehicles rented from local transportation companies. However, it /1 Much mechanization has been associated with tasks that are otherwise extremely demanding in terms of human labor, so that there is a quality of life dimension (as well as a production dimension) associated with certain types of labor displacement. /2 To take an extreme case, suppose each tractor in 1980 worked a full two plowing seasons versus only one in 1965; the 1980 plowed area would still (at 68 ha) be only about one third the 1965 area. Another possibility is that the data exaggerate the number of tractors actually available for use, due to the inclusion of tractors under repair or that have been scrapped. Some exaggeration of this kind is probably built into these estimates; one local estimate, for example, was that only 70% of tractors at the farm level were actually in use. However, the size of the recent increases in the tractor stock implies that the average age of vehicles could not have been increasing very rapidly, if at all. Hence this factor is unlikely to affect the general conclusion. - 75 - seems very likely that a considerable upsurge occurred in the late 1970s as incomes rose, rural markets were activated, and seasonal inputs such as chemical fertilizer became more widely available. 1957 1965 1970 1973 1976 1979 1980 Equivalent tractor units ('000) 15 82 145 310 603 1,085 1,213 Area mechanically plowed (million ha) 2.6 15.6 18.2 26.5 34.9 42.2 41.0 Average area plowed per tractor (ha) 173 190 126 85 58 39 34 3.39 At the current stage of development, there are in fact few alterna- tives to the tractor (except the animal- or human-powered cart, also still much in evidence) for local haulage work. Trucks suitable for road transport of agricultural materials are expensive to purchase and operate for communes, and a light, high payload and fuel-efficient road vehicle has yet to be developed for local manufacture./1 Fuel pricing policy has also heavily favored tractor transportation: tractors use diesel fuel, which is available at special subsidized rates for agricultural purposes (the rates have not been changed since 1965), while trucks use gasoline (which is sold at much higher prices), and are subject to heavy annual licensing fees. Agricultural Research and Extension 3.40 The contribution of scientific work to the development of agri- culture has been considerable, especially considering the low initial base and the need to build a system and train researchers with little effective outside help. Research has complemented irrigation development and the increased availability of chemical and organic fertilizer and the combination of research, fertilizer and irrigation has helped to make possible the large yield increases in cereal agriculture described in Chapter 1. 3.41 Research development seems to have focused mainly on rice and wheat, and results seem most striking for these two crops. However, indicated yields are relatively high for most other cereals and have also been increasing rapidly in the case of corn and sorghum. For rice particularly, China has pioneered a number of approaches in biological innovation. The first semi- dwarf improved rice was released in 1959, some seven years before the Inter- national Rice Research Institute released its IR8 variety. In the 1970s, /1 It is interesting that the 1980 report of Plan results describes a sub- stantial rise in the farm-operated stock of trucks from 97,000 (1979) to 135,000 (1980) - close to a 40% increase in one year. - 76 - China was the first nation to develop and popularize a rice hybrid, and it has developed techniques for rapidly stabilizing the varietal characteristics in new plant material. About 5 million ha of riceland is now planted to hybrids. The development and popularization of early-maturing, semi-dwarf, high- yielding varieties in the late 1950s to mid-1960s and of hybrid rice in the 1970s have contributed significantly to increased rice production during the past 15 to 20 years. The rice varietal improvement program has stressed yield and early maturation as the main breeding objectives, but many of the popular varieties planted today are also resistant to important diseases like blast, bacterial leaf blight, and sheath blight, as well as brown planthopper and other insect pests. 3.42 Research has also contributed to the significant advances in wheat and corn production of recent years. The main breeding objectives for wheat are: (a) early maturation for use in multiple cropping; (b) semi-dwarf cultivars adapted to irrigation; and (c) resistance to major disease like scab. Most improved varieties planted today combine high yield with the above desirable characteristics. Irrigation has also been extended to more than 80% of the wheat area and is a major factor in accounting for the yield and production increases. To widen the genetic resources, spring wheat cultivars were introduced from abroad (including Mexico). The materials were used to develop varieties suitable for the South and Northeast. Most of the 5 million ha south of the Chang Jiang was planted to Chinese-Mexican crosses and another 2 million ha in the Northeast planted to Mexican or Chinese-Mexican crosses. In the better areas wheat yields of close to 6 tons/ha have been obtained. Spring wheat has also been successfully intercropped with corn and other crops. Chinese scientists have been experimenting with hybrid wheat, pollen culture and mutation genetics, none of which has yet proved successful, however. About 70% of China's 20 million ha of corn is planted to hybrid varieties. 3.43 Apart from crop-specific research, China has done much pioneering work in other biological innovation, notably with the use of azolla and other green manures, in the development of biogas (and experiments to enrich the organic slurry for liquid fertilizer purposes), and in the use of forages and agricultural residues (rather than feedgrains), in livestock- fattening systems. 3.44 Good research work is ineffective unless the farming community has access to the results. In this regard, China's seven-level interlinked research and extension network has been studied as a model that other coun- tries might seek to follow. Indeed, the extraordinary rapidity with which research results are disseminated and applied by the farming community sets the Chinese experience off from that of many other countries. These features owe much to the extensive use of radio as a medium of extension advice. Thus far, the extension system seems to have been operated at an extraordinarily low cost, with a very high ratio of farmers to paid technicians. In Sichuan, for example, 1 or 2 extension staff stationed at the commune level serve an - 77 - average of 65 production teams and about 2,500 farm families; this ratio is much different from the 1:300-400 families aimed for by many other countries./1 3.45 These very high ratios, however, in part reflect the acute shortage of agricultural technicians, following the closure of training facilities during the Cultural Revolution period (as described in Chapter 2). Given the wide range of nonadvisory services that agricultural technicians assist with (including the collection of agricultural statistics and other administrative tasks), the authorities are attempting to increase the numbers of technicians, as soon as is practicable, to some three or four per commune. With many extension workers now near or past normal retirement age, however, the build-up will take several years to accomplish. Meanwhile, agricultural technical workers (for either research or extension-related activities) will remain in critically short supply. 3.46 The problems of extension work due to the Cultural Revolution and the low priority given to technical work in the early 1970s were also expe- rienced in agricultural research. The considerable pressures to conform to politically inspired technical doctrine and de-emphasis of basic research were very detrimental to effective work. Researchers during this period could not pursue one of their most important functions, which is the questioning and testing of prevailing conventional wisdom. In particular, insistence on the general application of experience specific to certain environments, such as the "Learn from Dazhai" campaigns, could not be questioned or the appropriate- ness of the policy investigated. Arising from past neglect and deterioration of facilities during this period, the limited local capacity for soil testing (as a basis for improved crop- and area-specific chemical fertilizer recommen- dations) is a continuing problem that has become more critical given the huge improvement in chemical fertilizer availability. 3.47 Chinese agricultural research has also suffered considerably from its relative isolation from the international research community over long periods of time, especially in regard to crops that were not of primary interest. Thus the technical contribution to improvements for many of the cash or industrial crops - sugar, tea, tobacco, cotton, etc. - does not seem impressive. Research on upland and dryland agriculture (including range livestock) has also been rather weak, although this has been a worldwide phenomenon until recently. Outside observers have also noted the need for improved coordination and communication between the various levels of research, especially given the considerable compartmentalization among the various subject- and crop-specific research institutions. /1 Short-course farmer training has also been extensively used in China to avoid the need for paid permanent staff. - 78 - D. Labor, Productivity and Earnings in Agriculture Labor Force Growth 3.48 China, with by far the largest agricultural labor force in the world, is also almost unique among the developing countries in its strong measures to limit urban expansion, despite a large emphasis on industrial development. Indeed, comparing data for 1952 and 1979, the proportion of urban to total population was constant at 13.3%, though this may partly be a statistical artifact, since, for example, commune townships are classed as rural. 3.49 The available data suggest that rural population growth was most rapid during the early period (2.6% p.a. in 1952-57) and slowed substantially during the 1970s, when population control policies were vigorously pursued. Data for the two most recent available years (1978 and 1979) suggest a growth rate of less than 1%, with some outflow to the urban areas, perhaps mainly associated with the return of urban school leavers sent to the countryside during earlier times. But apart from the migration factor, slower overall rural population growth can have little effect on the growth of population of working age for some time to come, since additions to the adult population will continue to reflect high birth rates of the middle and late 1960s. 3.50 As in most low-income countries, measurement of labor force and employment in rural areas of China presents formidable problems, since in practice almost the whole population works at various times of the year. (All age groups can accumulate household work points as claims against the annual distribution of the collective surplus.) State Statistical Bureau estimates for the commune labor force include as workers all females from age 16 to 55 and all males from age 16 to 60 who work for more than three months per year in collective work activities. 3.51 Official estimates of agricultural labor show an increase of about 2% p.a. over the whole period since 1952 - 2.3% in 1952-65 and 1.8% subse- quently. These data include the relatively small work force of the state farms. The slower rate in the more recent period probably reflects the growing importance of nonagricultural activities since the middle 1970s. Thus, total employment in commune-managed enterprises, probably of minor importance before 1970, grew to 13.1 million in 1979. Net Output and Labor Productivity 3.52 An appropriate measure of growth and productivity in agriculture, one that conforms with a national income measure of output, is net agricul- tural output or value added. In principle, this is obtained by deducting the various material costs of production, measured at constant prices, from gross output. In practice, at the present stage of development of China-s statis- tical system, official estimates of neither the costs of purchased inputs (measured either in current or constant prices), nor value added at constant - 79 - prices, is available nationwide./l Rough estimates can, however, be made with some plausibility. Methods are described in Annex A, paras. A.2-A.9. The estimated growth of net output, together with the growth of the agricultural labor force and implied productivity growth, is shown in Table 3.8. Table 3.8: GROWTH RATES OF NET OUTPUT, LABOR FORCE AND PRODUCTIVITY IN AGRICULTURE, 1952-79 (% p.a.) Net Net output output la Labor force per worker 1952-57 4.9 2.2 2.6 1957-77 1.6 2.1 -0.5 1977-79 9.4 1.0 8.3 1952-79 2.7 2.0 0.7 /a At 1970 prices, excluding brigade enterprise. Sources: Mission estimates of net output, plus official labor data. 3.53 Aggregate net output increased a little more slowly than gross output (2.7% p.a. versus 3.0% p.a.) over the whole period, essentially because the output gains were not commensurately as large as the increases in costs associated with the use of modern inputs (despite considerable price reductions for the latter in the 1960s). The striking features of the table are the apparent deterioration during the period 1957-77 when the use of inputs was increasing rapidly, and the very rapid increase in net output during the reform period (1977-79), when weather conditions were also generally favorable. 3.54 Despite the impressive gains of the past two years, it is clear that the result of past population increases, scarce land and limited /1 Data were, however, collected for Hunan province for net agricultural out- put and production costs (excluding labor) at current prices. They show the following pattern: 1952 1957 1965 1970 1975 1979 Net output 78.1 79.7 74.6 70.6 66.8 66.9 Production costs 21.9 20.3 25.4 29.4 33.2 33.1 100.0 100.0 100.0 100.0 100.0 100.0 A decline in production costs per unit of output has been reported at the national level from surveys of production team accounts for the period 1977-79. - 80 - alternatives to agricultural employment is a considerable element of labor surplus in many areas of the countryside. No detailed studies of this ques- tion were available to the mission, but the results of some recent surveys in Anhui and Sichuan of areas that had introduced household or group contracting procedures (para. 2.20) are instructive. Large increases in output, and hence income, from collective agriculture were obtained, while labor input (measured in labor days) was considerably reduced (by 20-30%) for major field operations because workers were remunerated according to results, rather than for work attendance. In these areas, household activities were also being vigorously encouraged and have provided expanding supplementary employment opportunities. Earnings and Living Standards in Rural Areas 3.55 Direct evidence of trends in rural living standards, for example through repeated surveys of income and consumption, is not available in a form that allows adequately for changing prices. It seems likely, though, that the productivity trends just described provide a fair reflection of past change. These data are consistent, for example, with the evidence of aggregate food availability as described in Table 3.3, which shows a small increase overall, and virtually no change between 1957 and 1977./1 3.56 Two modifying factors of some importance are (a) terms of trade effects, due to increasing procurement prices for agricultural goods versus near static and declining prices for industrial goods sold in rural areas, and (b) the growing importance of brigade- and commune-managed enterprises as a nonagricultural income source./2 The second factor probably adds more to collective savings than to actual consumption, since most profits are retained for reinvestment and most enterprises - at least at the brigade level - pay work points rather than wages at the average work point values of the respec- tive production teams. Thus such workers are not much better paid than their agricultural counterparts (although they usually receive some supplementary food allowances). To take an extreme case, if it is assumed that commune and brigade workers were paid an average 50% above agricultural workers, the net effect would be to increase 1977 and 1979 aggregate disposable rural incomes- by about 4% and 5% respectively./3 /1 Furthermore, urban real per capita incomes reportedly increased 60% between 1964 and 1979, so that any rural gain in per capita food availability was presumably very small. /2 Other factors that could also affect real consumption include changes in the allocation of production team net income between accumulation and taxes and distribution, and increased per capita net budgetary transfers to rural collective consumption, for education and health, for example. No information is available about these aspects; however, it is plausible that increasing savings offset reduced agricultural taxation, comparing the late 1950s with the late 1970s. /3 Based on commune labor force estimates of 302.5 million in 1977 and 305.8 million in 1979, and commune and brigade enterprise workers of 23 million and 29 million for the respective years. - 81 - 3.57 The "terms of trade" effect was described earlier in relation to investment (para. 3.22 and Table 3.4). The net effect of this change, comparing 1957 with 1977 and 1979, was probably substantial. The base of the calculation is shown as follows: 1952 1957 1970 1977 1979 --------- (Y billion) --------- Purchases of farm products 9.0 17.7 31.4 41.3 58.7 Current procure- ment prices Price index 62.3 74.9 100 107.2 136.1 Price index of industrial goods sold in rural areas /a 98.0 100.7 100 98.1 98.2 Terms of Trade (1970=100) 63.6 74.4 100 109.3 138.6 Exchange value of farm products for industrial 14.2 23.8 31.4 37.8 42.4 1970 prices goods Terms of trade effect -5.2 -6.1 nil +3.5 +16.3 Net output of agriculture 49.8 63.3 77.7 86.4 103.4 1970 prices, estimates Value added plus the terms of trade effect 44.8 57.2 77.7 89.9 119.7 1970 prices /a Based on a limited list of consumer and producer goods sold in rural areas. 3.58 Before discussing these results, two important qualifications relating to the estimation procedure should be emphasized: (a) the calcu- lation omits any terms of trade effect due to agricultural sales to other sectors outside the official marketing channels, and (b) that sales to the state agencies include goods that are subsequently resold in rural areas, but these transactions do not represent an opportunity for sector exchange of agricultural for industrial goods. Neither of these effects can be easily assessed in quantitative terms. The biases are in different directions, so that the net effect may be relatively small./1 In order of /1 For 1979, the State Statistical Bureau estimates sales by peasants to nonagricultural households at Y 4.75 billion; the Food Ministry estimates sales of grain in rural areas at about 25% of total procurement; at 1979 prices this is worth about Y 4 billion. - 82 - magnitude terms, the estimates imply that terms of trade changes may have roughly doubled the rate of increase of "agricultural real income" per worker over the whole period 1952-79 to allow consumption standards to rise at about 1.7% p.a. Of the improvement, however, more than 50% is concentrated in the two most recent years, 1977-79. Data comparing the growth rates of net output and real income (net output series corrected for terms of trade effects) are as follows: 1952-57 1957-77 1977-79 1952-79 ----------------- % p.a .-------------------- Net output per worker 2.6 -0.5 8.3 0.7 Net output per worker corrected for terms of trade effect 3.1 0.1 14.4 1.7 3.59 The recently reported data of 1978 and 1979 income-expenditure surveys confirm the suggestion of a very substantial rise in peasant income in recent years. The 1979 data show net income per capita at Y 160.2, an increase of 20% above the 1978 level (Y 133.6). Average distributed collective income (a much more restrictive concept, excluding private and wage income) was Y 74 in 1978 and Y 65 in 1977, an increase of 13.8%. These data are unlikely to be much influenced by price inflation; available price indices indicate little change from 1977 to 1978 and the 1978/79 data include income in kind valued at constant 1978 prices. 4. FUTURE PROSPECTS OF AGRICULTURAL DEVELOPMENT 4.01 Past performance in agricultural development, as described in Chapter 3, demonstrates the importance of policies and incentives for agricul- ture in China. Recent experience during the reform period of the late 1970s diverges markedly from that of the earlier 1970s and late 1960s; these experiences in turn are clearly differentiated from those of still earlier periods in the 1960s and 1950s. The blend of a collectivized agriculture and state management of the supporting framework of marketing institutions and sources of input supply is a powerful apparatus for the planned management of the sector. The policies and programs of the 1980s will continue to make a great deal of difference to agricultural development. - 83 - 4.02 In several ways, the challenges facing agriculture in the 1980s echo similar themes from the past. The social reforms of the 1950s set a pattern of effective demand for agricultural produce that has been dominated there- after by low-income, mass-market requirements for staples such as grain, vege- tables, cooking oil and simple cotton clothing. Population will continue to grow and with it the demand for basic foods, mostly cereals, which occupy a dominant position in the Chinese diet and in crop agriculture. Security of food supplies will also need to be maintained. The reliance of light industry on agricultural raw materials is likely to grow. With as yet a substantial majority of the 800 million peasants depending primarily on agriculture as their principal source of livelihood, ways must be sought to sustain and improve agricultural earnings and living standards. These objectives are to be met within a land constraint that promises to be just as severe in the future as in the past. Influencing the allocation of the land among its competing uses to match the changing patterns of national requirements is a challenge for the planners. Making the best use of the land's potential is work for farmers and farm leaders, and improving this potential through tech- nical change is the formidable task of the agricultural research and extension systems. 4.03 This chapter describes some of these ongoing efforts and various problems, with special reference to a technical perspective of agriculture's development prospects and major food requirements (Section A), and to economy- wide planning estimates and general policies (Section B). Section C describes some policy issues of possible significance in the future development, together with a discussion of investment strategy and priorities. A. A Technical Perspective of Prospects 4.04 Prospects of development in Chinese agriculture will continue to depend heavily on increased production of the grain crops, for three reasons: (a) grains still account for about 60% of the total gross output of agricul- ture /1 and 80% of the sown area; (b) prospects for other field crops that compete with grain in land use are greatly influenced by the area that will be required for grains; and (c) the largest component of output outside the crop sector, pork production, also depends increasingly on feedgrain supplies. The review is mainly focused on grains, other field crops and animal husbandry. 4.05 Earlier sections have described how past development in crop production has depended largely on yield increases, given the near fixity of the arable and cropped areas since 1965. In the future, new policies to control more strictly the alienation of agricultural land for industrial and other purposes are to be applied, and additional development in the Northeast (mainly via state farm development programs) may add significantly to the arable land base in that region. On the other hand, much new infrastructure /L Excluding brigade enterprise. - 84 - development (e.g. for hydropower, road widening) is likely to be required and some loss of productive agricultural land is inevitable. On balance, it seems unlikely that sufficient new arable or cropped land could become available to alter significantly the reliance on crop yield increases for future production growth. Foodgrain Production 4.06 Recent aggregate growth in foodgrain production /1 shows a rate of increase at about 3% p.a., due entirely to improved yields, with the area sown to grains declining slightly since 1970. The increase in yield over the 1970s was about 0.8 tons per sown ha, from a base of 2.0 tons per ha in 1970./2 Future prospects depend largely on further developments in crop technology, irrigation and fertilizer availability. A further factor, of some importance in the past, was a change in the cropping pattern so that more land was devoted to relatively high-yielding crops (e.g. rice and corn, with yields in the 3-4 ton range) and less to low-yielding crops (e.g. soybean and millet, with yields in the 1-2 ton range). It is unlikely that future changes in the cropping pattern would be so large, mainly because the area under low-yielding crops has already been considerably reduced and because protein-rich, but low-yielding soybean is now being encouraged. 4.07 The massive extension of pump irrigation in the Chang Jiang basin and North China Plain, and the widespread effects from greatly increased availability of chemical fertilizers, are other factors that served to raise crop yields in the recent past but are unlikely to help so much in the future. During the 1970s, the irrigated areas probably increased by about one million ha p.a., and chemical fertilizer availability (in terms of gross weight) must have at least quadrupled, mostly in higher quality, less volatile types. Plans for future irrigation developments (as discussed with the Ministry of Water Conservancy) suggest future targets for new development of 0.2-0.4 mil- lion ha p.a., much less than in the 1970s. No details of plans for chemical fertilizer were available, but clearly past rates of increase in supply cannot be sustained. Finally, agricultural research will continue to suffer from a lasting impact of the Cultural Revolution, with little prospect of increasing the numbers of qualified young researchers before the mid-1980s. 4.08 There are several factors, however, that improve the picture of future prospects. First, while the rate of new irrigation development is likely to decline, major efforts are planned to upgrade existing systems, through improved structures, water conservancy, and higher standards of flood and drought protection. Similarly, the quality of available fertilizers can be improved and increased use of phosphoric and potassic fertilizers (probably /1 Including tubers at one fifth the wet weight and soybeans. /2 Yields in 1980 averaged 2.73 tons/ha, but the crop year was seriously affected by poor weather. Yields in 1979, a good weather year, were 2.78 tons/ha. - 85 - involving increased reliance on imports) may have a substantial impact on yields in areas where use of chemical nitrogen is already high. Gains from rationalized distribution of fertilizer, based on local soil testing and fer- tilizer trials, may also be sizeable. The research programs can gain considerably from the availability of international experience and plant collections, especially, perhaps, for crops such as maize, sorghum, soybean and rootcrops, where past development in China has been more limited. Finally, an important plus factor is the emphasis that the Government is giving to agricultural development, both through incentives and policy development and through high priority to be given to research work. Chinese officials emphasize that while crop yields and technical standards are high in some parts of the country, much remains to be done in many low productivity areas. Insight into the importance of the recent policy changes is gained by considering their impact in Sichuan, one of the first provinces selected as an experimental area for subsequent reforms. In Sichuan, between 1976 and 1979, foodgrain production rose some 29% (to 32 million tons) and gross agricultural output by 34%; distributed income among commune members increased 49% over the same period. 4.09 With continuing major efforts, it seems plausible that aggregate foodgrain production might increase to about 410 million tons over the 1980s. Over the decade, this would imply a yield increase of about 0.7 tons/ha (with the sown area maintained at the 1980 level), so that average yields in 1990 would be about 3.5 tons/ha. Implications for food availability, taking into account population growth and other factors, are considered in paras. 4.15- 4.20 below. Oil-bearing Crops and Cotton 4.10 Oil-bearing crops and cotton together accounted for about 13 million ha in 1980; they are the major field crops that compete with grain in terms of land use./l The considerable increases in production, yield and sown area reported in past three years for the oil-bearing crops,/2 together with con- tinuing sizeable imports and still low levels of per capita oil availability, suggest a substantial future growth potential. Land availability is likely to be the major constraint. Yields of some major oil-bearing crops, such as groundnuts, are still quite low by international standards (about half US yields in this case), and groundnuts especially may develop further on the basis of specialization in high potential areas. A yield increase of 4% p.a. seems plausible for oil-bearing crops. 4.11 Prospects seem more difficult to assess for cotton, which occupied some 4.9 million ha in 1980. The planted area has recently recovered to 1965 levels and the 1980 crop (2.7 million tons lint) was a new record. With /1 In contrast with international usage, soybeans in China are not included among the oil-bearing crops. /2 From 5.6 to 8.0 million ha, 1977-80, with production increased from 4.0 to 7.7 million tons. - 86 - a 30% increase since 1977, current yields are about in line with international norms among developed country producers. Among these countries, cotton yields seem to have increased but little in recent years. On balance, yield growth at 2% to 3% p.a. for the 1980s might be feasible. A higher growth in produc- tion might be warranted, given likely increased demand (though synthetics are increasing in importance) and currently very sizeable imports. Other Crops 4.12 Prospects seem generally favorable for production and yield increases for such crops as sugar and jute and for the permanent crops, such as mulberry (for sericulture), tea, rubber and fruits. In general, these crops either occupy relatively small areas of arable land (sugarcane and beet comprise less than a million ha) or, in the case of most permanent crops, occupy uplands not suited for grain. As noted earlier, several of the permanent crops have demonstrated high growth rates in the past, accompanied by some increase in the planted area; yields are still low by international standards (many stands are as yet immature). Relatively low yields in China, limited research efforts in the past and fuller use of local comparative advantage are also reasons for expecting fairly rapid growth (4-6% p.a.) among some of the lesser field crops. One important crop for which output data are lacking is vegetables, estimated to occupy some 3.23 million ha in 1979. For vegetables though, physical yield prospects are less important than the potential for substituting high for low value crops on the given land base. Demand and marketing facilities permitting, substantial productivity increase of this sort appears possible in the 1980s, given the dominance of low grade cruciferae (cabbage) in current vegetable production./l 4.13 With grain yields growing at 2.3% p.a., cotton and oilseeds yields at 3% p.a. and other nongrains at 5% p.a., the analysis suggests a growth rate for crop agriculture as a whole, based on current land use patterns, of about 2.8% p.a. for the 1980s. Whether these growth rates would materialize in fact will depend heavily on supporting services and investments for agriculture and the adequacy of price and other production incentives. These questions are discussed in Section C. Other Agricultural Activities 4.14 Pork production accounts for about half the value of other agri- culture and about three quarters of animal husbandry. Technology as such seems to present little problem in increasing pork supplies at a rapid rate./2 /1 The average 1979 procurement price for vegetables, reported as only Y 0.09 per kg (i.e. less than 3 cents/lb), is indicative of the dominance among vegetables of low-value crops. /2 The US pig industry produces some 7 million tons annually from a herd of 60 million; China's current stock of over 300 million produced about 12 million tons in 1980. - 87 - China has an enormous stock of pigs, offtake rates (with a long fattening cycle, 8-10 months) are relatively low, and slaughter weights (except for officially procured pigs) are low./1 One major question though is the future availability of feedgrain or substitute concentrates in sufficient volume to support higher production. In the past, considerable emphasis was given to fodder-based feeding practice and probably little more than a quarter of hog feed was in the form of grain. Recent policies have encouraged the use of feedgrain, primarily through various incentives in official procurement, and the average procurement weight of pigs increased considerably, by about 10 kg over a two-year period (to about 86 kg). Aggregate meat production (over 90% pork) has increased by over 50% in the past three years, a response to higher procurement prices and more grain made available for use as pig feed. Incremental (unmilled) grain requirements for fattening are likely to be in the range of 3.3-4.4 kg of grain per kg of meat. While future growth depends largely on feedgrain availability, there is some scope for further development of other ration supplements such as cottonseed, rapeseed cake, soy cake, etc., much of which is now used as fertilizer. Breed improvement programs to upgrade the sometimes indifferent stock quality are also underway. 4.15 Poultry and inland fisheries are other important high-value pro- tein sources whose production may similarly be constrained more by feedstuff availability than by technology. Although aquaculture production has risen at about 6% p.a. since 1976, this was not quite enough to offset an aggre- gate fall in total fish production, due to a decline in capture fishery pro- duction. Little information is available about poultry, although it is almost certainly second in importance to pork as a source of meat. Recently, several modern feed-intensive broiler factories have been established in the rural environs of large cities, fed largely on imported coarse grain. Prospects for other meat sources - beef, goat meat and lamb - are generally favorable, but base levels are very small compared with pork. For beef, the Government hopes to enlarge considerably the currently small herd, mainly through better utilization of the northern grasslands and southern uplands. Foodgrain Requirements 4.16 Some of the options and problems in supply and demand management are illustrated by Table 4.1, which presents indicative figures for grain utilization under alternative assumptions. The 1980 base year estimate of production, at 325 million tons (116 million ha times a yield of 2.8 tons/ha) is above estimated at 1980 production (318 million tons) - the latter reflecting the particularly poor weather conditions in 1980. The estimate of direct consumption of grains by households is derived as a residual, after deduction of requirements for seed, feedgrain and industrial uses estimated as 20% of 1980 production, or 65 million tons. After allowing for these amounts, and net imports of 12 million tons, the grain available for direct consumption would be 272 million tons. /1 For example, in Sichuan, pigs sold to the state at 65 kg liveweight or more give the seller the right to purchase 25 kg of unmilled grain at quota procurement prices. - 88 - Table 4.1: ILLUSTRATIONS OF SUPPLY-DEMAND BALANCE IN FOODGRAINS, 1990 1980 1990 1990 1990 (a) (b) (c) ------ (million tons) ----- Supply Domestic production 325 370 410 450 Net imports 12 26 12 - Total 337 396 422 450 Utilization Direct requirements 272 318 318 318 Seed feed and other uses 65 78 78 78 Total 337 396 396 396 Surplus - - 26 54 Source: Mission estimates, described in the text. 4.17 For the indicative estimates of 1990, direct consumption require- ments are increased in line with population growth (1.25% p.a. according to projections explained in Annex H, paras. 3.09-3.12), and other demographic factors, including the changing age structure and the increasing body size of the population. In combination, these factors imply that to maintain 1980 consumption levels would require about a 17% increase in direct consumption, i.e. 1.6% p.a. The 1990 direct requirement for grain (at 1980 consumption standards) is thus 318 million tons. Other uses might similarly increase by about 20% over 1980 levels, in particular, with grain for feed increasing by about 8 million tons to maintain 1980 per capita meat consumption levels. The total requirement is thus estimated at 396 million tons. 4.18 The illustrations of 1990 foodgrain availability and utilization begin in column (a), with a hypothetical "worst case" situation that assumes 1990 production at 370 million tons (10% below the technical perspective estimate of 410 million tons). This scenario implies a return to the situa- tion of the mid-1970s, with no scope for improving meat availability, and heavy pressure to reduce the areas planted to oilseeds and cash crops (cotton) in favor of grains. Just to maintain the 1980 per capita consumption levels would require a substantial increase in foodgrain imports. Under this - 89 - scenario, aggregate crop production might grow at about 2% p.a. With produc- tion heavily constrained by feed availability, the other large components of agriculture, livestock and fisheries, would probably average no more than 2.5% p.a. growth. Overall agricultural output growth would then be about 2.2% p.a. 4.19 Column (b) describes a situation with 1990 production at 410 mil- lion tons, and net imports of grain at 1980 levels. Production plus net imports at 422 million tons would allow a small improvement in per capita consumption. If half the surplus of 26 million tons was absorbed as increased direct consumption, the rate of increase per capita would be 0.4% p.a. If the balance was allocated to livestock feed, per capita meat availability could increase by 2.1% p.a. On the assumption that 1980 import levels are main- tained, crop output growing at 2.8% p.a. (para. 4.13), plus livestock and fisheries at 4% p.a., suggests an aggregate growth rate of about 3% p.a. 4.20 The final illustration, 1990 (c), describes a "best case" situation, with grain production 10% above the 410 million tons estimate, i.e. 450 mil- lion tons. Imports could be eliminated, meat consumption could increase sub- stantially, and average grain consumption per capita could be improved. Under this scenario, overall growth of agriculture might be about 3.6% p.a., i.e. roughly a 2% p.a. per capita increase. 4.21 The above discussion serves to underline the critical importance of rapid yield improvement and grain production increase for China's future agricultural development prospects. As illustrated, a 10% difference in the grain production projection for 1990, associated with a difference in yield growth in the range of 1.3% p.a. (the worst case) and 3.3% p.a. (the best case), would make a vast difference in the options available to policy makers for agricultural and rural development. Given the inherent uncertainties of such projections for agriculture, neither 1.3% p.a. nor 3.3% p.a. could be dismissed as totally improbable. B. Objectives for Agricultural Development 4.22 Aggregate Consumption and Supply. As noted in Chapter 2, the Chinese authorities are currently preparing 5- and 10-year outline plans for the 1980s. Since agricultural output in very large part is directed towards household consumption requirements, the planned growth of household consump- tion is clearly a key parameter in determining overall demand prospects for the agricultural sector. In turn, growth of consumption itself will be shaped in part by supply prospects in agriculture, especially if, as seems likely, overall trade prospects would not allow for any substantial deterioration in the agricultural trade balance. This section illustrates some of the issues of supply and demand balance in agriculture from the perspective of the economy as a whole, taking into account the earlier discussion of technical constraints and grain utilization. - 90 - 4.23 Aggregate real growth of net output in the economy as a whole is estimated at about 5.3% p.a. for 1957-79;/l accompanying this relatively high growth rate was a large increase in the share of accumulation in total net product (from 23.2% in 1957 to 31.1% in 1979). Real consumption outlays thus rose much more slowly than total outlays. A key objective of future strategy is to increase real consumption at considerably faster rates than in the past, with major implications for agriculture, which accounts over 60% of aggregate household consumption outlays. Moreover, with growth of population much slower than in the past, per capita consumption growth rather than population growth would dominate changes in the structure of aggregate consumption. 4.24 What are the implications for agricultural production of aggregate consumer expenditures rising faster than in the past, and what might follow from per capita expenditure increases much above the past rates of increase? Only very rough answers to these questions can be provided on the basis of the data currently available. As regards the aggregate increase, a target of, say, 5% p.a. growth in real consumption might require about a 3.5%-3.7% growth in agricultural production./2 The impact of increasing per capita expendi- tures on the pattern of agricultural production would be important. A consid- erably faster than average rate of consumption increase would probably be experienced for items with high expenditure elasticities, such as meats and fish, vegetable oils, sugar, textile products (cotton and wool), various sideline products and forestry products (for housing construction materials and furnishings). In sum, the suggestion from the demand side is that change in the commodity mix within agriculture would be needed to accommodate changes in the pattern of demand. In addition, a fast aggregate rate of agricultural growth will be required. 4.25 These projections can be compared with the various alternatives described in the earlier discussion of the technical perspective of future grain output. First, if grain output falters significantly (the 1990 "worst case" (a) of Table 4.1) so that no more than a 2.2% p.a. growth of agricul- tural output is realized, a 5% growth target for real consumption would almost surely prove infeasible and economy-wide growth prospects would be severely compromised. At the other extreme, with grain output of 450 million tons under the 1990 "best case" (c) scenario, aggregate growth in agriculture /1 See Main Report, Tables 3.4 and 3.10, for this and other parameters discussed in this paragraph. /2 As discussed in para. 4.17, growth of about 1.6% p.a. would be needed to meet demand generated by the population increase when the effect of an aging population is included. Without consumption expenditure elasticity measures, it is difficult to predict the incremental agricultural require- ments of higher per capita outlays. But given the high initial share of over 60% and some initial restrictions (rationing), a growth at 2% p.a. from increased per capita outlays seems reasonable. - 91 - corresponding to requirements would seem assured, and the sector would have the flexibility to respond to changes in demand structure resulting from higher per capita consumption levels. The intermediate and more likely case is with agriculture growing at about 3% p.a., somewhat below consumption needs. Management of aggregate demand would call for a careful balancing of trade opportunities, rural and urban supplies, and, probably, continued rationing of the most important items (grain, cotton and oilseeds). Agricultural Output and Rural Income 4.26 Since farm households are both the producers and the major consumers of farm products in the Chinese economy, prospective agricultural growth and consumption growth are both closely linked to income growth in the rural areas. Indeed, in a statistical sense, if income and consumption do not increase rapidly in the rural areas, then attainment of a 5% p.a. growth in aggregate consumption must rely on considerably more rapid growth among the minority urban and industry-based population./l Already the income differen- tials between rural and urban areas are considerable, so that growth of rural per capita consumption at least as fast as the national average would seem desirable. But the threat of a widening gap between rural and urban incomes is inherent in a situation where agricultural growth lags substantially behind nonagricultural growth and rural/urban migration is restricted. The policy options that would avoid, or at least minimize, the adverse impact of slow agricultural growth on rural incomes include: (a) permitting greater rural to urban migration than in the past, especially by promoting urban employment opportunities in the service sectors; (b) maintaining rapid expansion of brigade and commune industry; (c) improving productive employment opportunities in agriculture by restraining the use of labor-replacing inputs and encouraging labor-intensive techniques; and (d) improving the agricultural terms of trade, possibly in conjunction with heavier taxation of higher income segments of the rural popu- lation. 4.27 All these options have both advantages and possible disadvantages. Greater rural to urban migration, since the rural population is so much larger than the urban population, could have no more than a small initial impact on the total numbers in rural areas. But if concentrated on particular poor /l Currently, the commune population may account for about 75% of aggregate consumption expenditure. Assuming growth at only 2% p.a. in this category, consumption growth at 5% p.a. overall would require growth of consumption among the noncommune population at over 11% p.a. - 92 - areas (a strategy which is more feasible in China than in other developing countries, since migration can be administratively controlled, and since the level of education among the rural poor is high), migration could have a comparatively large impact on rural poverty. On the other hand, urban indus- try is already generally overstaffed, and urban unemployment is already regarded as a problem. There is substantial scope for absorbing labor in services (with the possible exception of public administration), especially in collectives, which are receiving increased governmental support. But the extent to which this would be possible, and the institutional changes that would be needed, are matters which require further investigation. Urban infrastructure needs must also be considered: if all population growth over the next decade were to be absorbed by the cities, their population would double; the costs of providing the necessary additional housing, roads and social services would be huge (though it should of course be compared with the cost of other options). 4.28 Absorbing all increments to the labor force outside agriculture would require nonagricultural employment to grow in the 1980s at 5.5% p.a., compared with 4.0% p.a. during 1957-79. This is unlikely but not impossible, especially since much of the nonagricultural employment growth could occur (as in the past) in rural rather than urban areas. More generally, the role of brigade and commune enterprises in providing supplementary income in the 1980s will clearly be critical. In the mid to late 1970s, commune and brigade enterprises became "an engine of growth" in rural areas: their output growth averaged 18% p.a., and their share in rural net output and income rose from a very low level in 1970 to about 15% in 1979. If growth of these enterprises can be maintained at high rates, their contribution to future rural income growth could be significant. For example, the combination of 9% p.a. growth of enterprise income and 3% p.a. growth in agriculture would cause total rural income to grow at 4% p.a. But some of the factors that have stimulated past rapid growth of enterprise income may be less in evidence in the 1980s. One is favorable tax treatment (a three-year tax holiday, and low rates for certain types of enterprises). Another is a cost-price structure permitting substantial profit from transforming low-priced agricultural materials into high-priced industrial commodities. A third is limitation of investment opportunities in agriculture proper by the discouragement of specialization. Thus reforms in pricing, taxation and agricultural policy could all worsen prospects for rural enterprise development. Shortages of energy and indus- trial raw materials are also adversely affecting growth, and have led to the closure of inefficient enterprises. On the other hand, the vigorous develop- ment of manufactured exports should continue to stimulate rural enterprise development. Promotion of agricultural sidelines and specialized crop poten- tial should likewise create many new local processing opportunities. 4.29 An important source of rural income growth in the past has been adjustment of the terms of trade in favor of agriculture - through both increased agricultural procurement prices and reduced prices of industrial goods sold in rural areas. To add one percentage point to rural income growth in the 1980s would require procurement prices to rise about 18% over the - 93 - decade (if the amount procured increased in line with gross output). By 1990, the resulting annual resource transfer would be about Y 14 billion - similar to that achieved by procurement price increases between 1970 and 1979. Improvements in the agricultural terms of trade, which are a way of transfer- ring some of the faster growth of urban labor productivity to rural people, may be desirable not only on equity but also on efficiency grounds, since they could encourage faster growth of agricultural production. But they will be limited by the need both to keep urban real incomes growing (which will make consumer price rises difficult) and to avoid further strain on the budget (through larger subsidies). However, some of the cost of raising the relative prices of agricultural commodities could be financed through increased taxation of agricultural income or land in higher income areas. 4.30 Finally, it is important to increase the earning capacity of agri- cultural workers through appropriate choice of production techniques. For example, more careful attention should be given to the net profitability of various types of labor-displacing agricultural machinery - taking account of the value of the displaced labor in alternative activities (including leisure, more of which might be desirable in areas where working hours are currently very long). Better technology choices should also help to keep up the ratio of value added to gross output. 4.31 Though some poor areas will be among the biggest gainers, it is likely, as the Government recognizes,/l that the current agricultural policy of allowing each region to develop according to its comparative advantage will on balance tend to further widen regional income disparities. Commune and brigade industry growth, too, is likely to continue to be slowest in the poorest areas, whose financial resources are small, and which tend to be far from the best markets and sources of inputs. Even increased agricultural prices will do least for the poorest groups, whose marketed surpluses are small, and will actually harm those of the poor who are net purchasers of /1 "We should advance in a series of waves instead of covering the whole area with scattered efforts. The financial and material resources for agricultural use should be managed in order of priority so that they can be fully and effectively utilized. Priority should be given to locali- ties possessing the required conditions and greater efforts should be made in these localities. If the production in these localities rises markedly and peasant incomes increase rapidly, that is good and not bad, because it will produce a great demonstrative and encouraging effect in the whole country." (Decision of the CPP Central Committee on "Some Questions Concerning the Acceleration of Agricultural Development," published in Wen Hui-Bao, October 6, 1979, p.1.) - 94 - food. It is thus essential, as the Government also recognizes,/l to take special measures to attack rural poverty. But although a fund for backward areas was created in the 1980 budget, the amount involved (Y 500 million) was small, and a detailed antipoverty program has yet to be formulated. This question is further discussed in paras. 4.49-4.52 below. C. Agricultural Policies and Programs 4.32 It is clear from the discussion thus far that well designed policies and programs have an important role through what is likely to prove a diffi- cult and challenging period for agricultural development. The authorities have made significant reforms in agricultural policy and are giving consider- able emphasis to improved performance in major agricultural programs. These efforts already seem to have had a considerable favorable impact on agricul- ture-s performance, as discussed in Chapter 3. Considering the importance of the reforms, the diversity of conditions in Chinese agriculture, and the still short period since their introduction, longer term effects are also likely to be considerable and of particular benefit perhaps during the early to mid- 1980s. This section considers issues of potential importance in future policy work and program development. The analysis is highly tentative since a great deal remains to be done in assembling relevant information and data as a basis for more thorough study of the policy reforms and their impact. At this stage, therefore, what follows is essentially series of observations and com- ments on the ongoing reform and adjustment process, and discussion of new problems that seem likely to arise as current changes in agriculture gather momentum. The concluding paragraphs summarize some important considerations in future investment strategy for the sector. 4.33 Systems of Reward and Work Incentives. Among the most important of the post-1977 reforms are efforts to strengthen the link between work done in agriculture and rewards pertaining thereto. The main features described more fully in Chapters 2 and 3, are: /L "Crop yields have been low and grain shortages have existed for a long time in some parts of North-West and South-West China and in remote mountainous areas, minority nationality regions and border areas. Con- sequently, the people there live in poverty. The slow development of production in these areas is not only an economic but also a political problem. The State Council will set up a special committee, composed of responsible comrades from departments concerned, to make overall plans and organize forces to support these areas materially and technically, and to help them lift themselves out of poverty by developing production. It is also necessary to help poor communes and brigades in other parts of the country to better their situation as soon as possible. Funds allo- cated by the state as aid for poor communes and brigades must be used for purposes of production and construction." (Same source as previous footnote.) - 95 - (a) restoration of and encouragement for household agricultural activi- ties and individual enterprise, associated with the lifting of restrictions on public markets and widening the range of permissible commodities (including grain) in local trade, and in some areas with the allocation of additional land to households and wider access to collective lands for grazing, fodder, etc.; (b) encouragement of larger allocations out of production team collective distributions according to work points and smaller allocations as assured per capita rations; and (c) the creation of systems of subcontracting within collective agricul- ture itself, so that small groups or households gain additional income from production that is surplus to some agreed norm (but with penalties for failing to reach the norm). 4.34 The effects of such changes are pervasive and likely to be felt for some time after their initial implementation. While the full extent of the executed reforms is not known, the reform process is certainly incomplete. Some elements (such as the opening of markets) are now widely applied but others (changing work point systems and contracting) much less so. Recogniz- ing the potential for considerable disturbance and perhaps some danger in such a major change, the authorities have deliberately adopted an approach that emphasizes experimentation, with some areas designated as testing grounds for various approaches. It follows that there may be considerable scope for further improvement as the results of these experiments and of the various local modifications are studied and evaluated. It is unlikely that any one system, for example of within-team contracting, would prove optimal in all situations. But some schemes will work better than others, and it is desir- able that more effective schemes be substituted for those that are less effective. Subsequent efforts are of course conditional on thorough and detailed investigations of the initial experiments; practical economic and social research by Chinese scholars is important in this regard. 4.35 The sort of problems that such changes give rise to can also be illustrated. In one province selected for advanced experimentation, peasants were found to be working harder and faster in collective agriculture (facili- tated by task-related payment systems) in part to make more time available for household activities, which were also, in general, being encouraged. For cer- tain collective tasks, reported time savings per task were as much as 30% of the time taken under the old system. In this case, sizeable all-round gains in production and productivity seem to have been realized. In collective agriculture, median levels of output increased by 10-20%, for example. Yet this outcome is not inevitable, unless reforms in payment systems for collec- tive agriculture proceed together with the encouragement of household activi- ties. Households keep all the net rewards from any additional efforts they make in the latter activities, but in collective agriculture, only a part of such net reward is returned to the individual unless payment systems are well adjusted. Hence peasants may embrace opportunities for additional household - 96 - activity and income to the detriment of their collective work. Cases of this sort have also been reported in some parts of the country. These aspects are worth special attention in evaluative research. 4.36 Diversification. The authorities have given great emphasis to diversification of production in local agricultural planning. The objective is to pay greater attention to the local environment and its ecology, and at the same time to aim for more systematic exploitation (based on the areas' particular soil, topographic and even micro-climatic conditions) of what may be a myriad of small, but collectively important, sideline agricultural activities. Again, the full effects of these policies are likely to take several years to develop, since a good deal of the initial work relates to the new planting of various permanent crops (including tree crops) on hillsides and marginal arable lands. For upland agriculture, this approach is particu- larly apt and important, as these areas have, on the whole, gained least from modern technical development (improved cereal varieties, chemical fertilizer, machinery and irrigation are all largely addressed to lowland agriculture). The diversification approach also fits well with subcontracting and task- related reward systems, and it is indeed encouraged where these systems are promoted. 4.37 The main obstacle is the considerable dependence of diversification on transportation and marketing facilities. A wide variety of crops and other outputs calls for a correspondingly diversified marketing infrastructure (including packaging, distribution and storage), which must be available during what may be short but intensive harvesting periods. The ready availa- bility of specialized input requirements, both seasonal and longer term, is also important. The marketing system is still somewhat deficient and consid- erable investment seems likely to be required. Diversified agriculture also typically relies mainly on road transportation. Considerable upgrading of roads (especially in the more difficult upland terrain), as well as the actual availability of transportation facilities, is rather critical. 4.38 Specialization. This is the other side of the coin vis-a-vis respect for the local environment and use of its potential. Where natural conditions favor particular types of crops - e.g. the sandy loams of parts of Shandong favor groundnut cultivation - the intention is to encourage speciali- zation rather than to discourage it (as was sometimes done in the past in promoting local self-sufficiency). These effects already seem to have been important, as evidenced, for example, by the remarkable upsurge in oilseed production in Sichuan and other provinces, groundnut production in Shandong, and by the dramatic improvement in cotton yields. Further study of effects must await publication of detailed crop records in specific localities. Also, the long-term effects on certain permanent crops are still to be observed. As with diversification, the potential is to some extent limited by the availa- bility of transportation (in this case including prospects of increased longhaul traffic, rail and waterway, as well as road transportation) and marketing services. - 97 - 4.39 One policy concern, if not already important, may become so as specialization proceeds. Producers normally make production decisions accord- ing to the benefits and costs that they themselves realize. In China, because of internal price distortions, these are likely to differ from the costs and benefits evaluated from an economy-wide perspective. The problem is partly one of economy-wide uniformity in transportation tariffs in China and partly the appropriateness of the low prices (relative to world prices) currently charged for various major inputs, notably diesel fuel, used in agricultural transportation. This is a difficult problem that raises far-reaching issues. In the absence of market forces for adjusting prices and costs to reflect the real cost differentials, physical planning clearly has a continuing role in determining regional and local specialization patterns. 4.40 Local Autonomy and Indirect Planning. Given the continuing adjust- ments needed to realize the full benefits of the various reforms, the produc- tion team must be given a good deal of freedom in making decisions and imple- menting changes in the light of the specific local conditions. Local autonomy of this type is indeed being promoted as part of the reform program, though the degree of autonomy varies considerably by province and local area./1 4.41 In encouraging local autonomy, an important question arises of how to reflect national or provincial priorities and requirements, especially in regard to annual crop production objectives, once the system of physical plan/ crop targets is abandoned. This question is being extensively debated within China itself, but no clear policy determination seems to have emerged at this time. The most obvious substitute mechanism for old style planning is greater use of market forces and the price mechanism to convey the relevant signals to the production teams. Use of prices as a means of indirect planning is not new in China, and it is in keeping with the further objective of strengthening the role of economic principles in agricultural production. 4.42 But there may be disadvantages attached to the use of price adjust- ments for output planning. One problem already mentioned stems from the established system of unified, nationally determined procurement prices for strategic commodities (including some agricultural commodities), with little regional differentiation. Greater regional differentiation of prices is likely to be particularly important in a transitional period and at a time when the problem of transport costs is not yet resolved. For example, addi- tional production in zone X is of little use when additional production is needed in zone Y; and a nationally uniform price adjustment could encourage production in zone X, since producers there would not incur the real costs of moving their production to a market. Thus uniform price adjustments could create rather than resolve inefficiencies. Consideration of this point /1 Thus, some important provinces are only now announcing plans to relax old style planted area targets in agriculture. (Cotton area targets are still maintained as a matter of national policy.) - 98 - diminishes some of the apparent simplicities of indirect planning via price adjustments. And it reinforces a point made earlier, that it is difficult to reform one part of the system without simultaneously addressing problems in other parts. 4.43 While greater use of the price mechanism may face some problems in the current institutional setting of China, it is nonetheless a flexible and powerful instrument to align producer decisions with national priorities. Moreover, price changes can be introduced progressively, in a series of discrete, small adjustments. The Chinese producer is likely to be highly responsive to price changes, although thus far, with rather uniform and sometimes large adjustments, few opportunities have been available to measure response as such./. 4.44 Weighing the pros and the cons of indirect planning based on price adjustments, it seems likely that the authorities will move into the 1980s with a pragmatic approach that combines continuing elements of direct planning with greater use of price adjustments than at earlier times. The collective system and the well-established hierarchy of planning controls, from the team upwards through county and provincial levels, facilitates such a mixed approach. For example, China can implement a two-tier price system, in ways that would prove more difficult in most countries. The system of "within- quota" prices for official purchases up to given quantities, and "above quota" prices for quantities in excess of quota purchases, is an example of this. The state can provide substantial incentives at the margin of production without paying the full cost of such incentives, as would be the case under a regime of uniform prices. 4.45 Field Management. The encouragement of local autonomy and ini- tiative in production decisions under the reform program lends added emphasis to the management function, especially the role of production team leaders, and brigade and commune officials. Even at the lowest levels, responsibility is exercised for a farm unit that is not particularly small; with arable, largely irrigated, land of 10-15 ha, the average production team operates a farm that is slightly larger than that in France for example. In many respects, management functions have already greatly changed since the early 1950s. At that time, it was appropriate to give major emphasis to land con- solidation and development, organizing the newly enfranchised peasant families and creating the system of collective farming that has since endured. But beginning in about the early 1960s, and increasingly thereafter, it became necessary to use the tools of modern agriculture (machinery of various types, new plant varieties, chemical fertilizer and insecticide), and to attempt to balance the costs and returns of using greater or lesser amounts of them. Under the system of direct planning, these management skills were perhaps /l The upsurge in marketed hogs and eggs following the 1979 price increase is one instructive case, however. - 99 - never as important nor as well developed as they should have been, parti- cularly at the level of the production team itself. But these skills are clearly becoming of central importance in the 1980s, as returns must be increasingly sought from proper use of the available technologies and modern inputs; from relatively small variations in cropping patterns and sequences; and from a more careful evaluation of costs and returns in the use of inputs. The complexities of the management task are likely to grow as the stock of equipment and facilities in use is augmented and as brigade- and commune- managed enterprises play a greater role. The successes and failures of collective agriculture in the 1980s and 1990s will depend a good deal on the quality of management, as well as the linking of material rewards with effort. 4.46 One advantage of collective agriculture is that training one team-level manager serves the needs all the families in his production team. Management training in farming in most developing countries, which generally have individual rather than collective farming systems, usually poses near insuperable problems because of the numbers involved and the small size of the farm unit. Yet one of the most striking differences between the developing and the developed countries is that in the latter, few could now contemplate a career in farming without extensive professional training./l The selection and training of managers for collective agriculture is an important concern for the 1980s. Management training for the elected team leaders and brigade officials was not directly observed or discussed in detail by the mission. It would appear, however, that while efforts are being made (mainly at county and lower levels), in overall terms these are fairly limited. The adequacy of training in China-s collective farm system seems worthy of close consideration and attention. 4.47 A question closely related to the management issue is the adequacy of the information/data processing system and the accounting framework as management tools. As outlined in Chapter 2, the system of production and distribution accounting is a vital component of collective agriculture, since (in conjunction with work point recording) it is the basis for distributing collective income and determining collective retentions, accumulation, etc. But judged on the basis of a few samples, team and higher stage accounts seem rather poorly designed to serve management purposes in farm planning and operations, especially since production cost accounting is little developed. /1 Clearly this sort of training is not required at the team or even the commune level at this stage of development. On the other hand, this type of training is increasingly relevant and appropriate for some of the larger state farms, which, by any farming standards, are major enter- prises. It could be an important element in ongoing efforts to improve the performance and efficiency of the state farm sector, especially since this sector's role in providing market supplies of grains and industrial crops is expected to expand in the 1980s. - 100 - 4.48 Some experimentation and investigation may be warranted to see whether application of modern farm management practice, which is based on production economics and a modern data processing capability, might be helpful in collective agriculture. This too is an area where modern practice has evolved considerably in the past two to three decades. The technology itself, with the development of low-cost calculators and even micro-computers, is increasingly adapted to small-scale applications. Once established, production teams might "buy" such a service from a specialized unit established at the brigade or commune level at very little expense. 4.49 Regional Development and Poverty-Oriented Programs. Thus far most planning and programming of agricultural development has been done by, and was in relation to, the various administrative levels (national, provincial, county, commune, brigade, etc). Planning by sector of activity is the respon- sibility of the various ministries and agencies, which also operate at the different administrative levels, especially the higher levels. As described in Chapter 2, a good deal of effort goes into the annual plan, while five-year and other longer-term planning has not been very effective in the past. 4.50 For the 1980s, when policies are expected to be more stable and more time available for proposals to be properly worked out and progressively implemented, thought is being given to various types of longer term planning and how they might best be developed and applied. Much work of this type can appropriately be done at the subsectoral or ministerial level. To take but two important examples, a long-term program for the development of agricul- tural research activities would be a responsibility largely of the Ministry of Agriculture. Similarly, master water development plans for river basins fall under the Ministry of Water Conservancy. Other types of planning (especially regional planning) call for interministerial or interagency coordination and are in some ways more difficult to make effective. The authorities have already indicated a keen interest in regional planning, for instance by setting up a high level Commission of Natural Resource Survey and Agricultural Zone Planning. Also, they intend to concentrate special efforts in the devel- opment of "commodity base" areas, where resources and facilities will be coor- dinated to stimulate the production of high priority crops - grains, cotton, sugar, etc./l 4.51 This type of planning, too, could have importance in the 1980s as a means of addressing the difficult and diverse problems of the less advanced areas. For example, the loess plateau area poses especially difficult problems for development, with its limited natural resources, large though scattered rural population and with incomes among the lowest in China. In many years it requires special assistance from the State, involving relief /l Many of these areas are in the northeast and in the border provinces and are associated with the programs of the Ministry of State Farms and Land Reclamation. - 101 - contributions for food grains and other daily necessities. Agricultural prospects are also not very favorable given what appears to be very limited potential. Hence this area (and other, generally smaller, areas elsewhere in the country, such as the southern uplands and saline floodplains) might rapidly fall further behind the more dynamic and relatively prosperous zones, and the already large geographical differentials in income would further increase. Experience with problems of this type in other parts of the world indicates considerable merit in developing special approaches to the problems of such areas through a long-term regional development plan. 4.52 Efforts of this type can cater to the particular needs of any locality, with special fund appropriations and, equally important, the allocation of specialist skilled staff to assist with program implementation. Such a plan and accompanying program is usually important: (a) because the problems of such areas will usually call for actions and subprograms under various ministerial or agency jurisdictions that need special coordination mechanisms to work effectively; and (b) because the plan may call for some substantial initiatives that are beyond the resources of each of the local administrations acting separately, e.g. possibly a major research institute to focus attention on the particular farming systems of the problem area. In many instances, the type of plan and program called for will be of a long-term character, in outline form as long as 20-25 years. Such a perspective facili- tates division of the work program into appropriate phases, with actions during any one phase calculated to lay the basis for, and to lead into, the next phase. Some special funds (Y 500 million in 1980) are already earmarked for this type of special effort. Program design, as well as money, can make the critical difference in program effectiveness. 4.53 Planning for Local Development and Rural Industry. A second type of spatial planning that may also be increasingly important relates to the already fairly advanced rural areas, which perhaps have considerable potential for further development. In many of these areas, the development of rural enterprises at brigade, commune and county town levels has been a very important feature in recent development, generating large increases in output, employment, savings and wage incomes. A major transformation from rural/agri- cultural to a mixed industrial/agricultural economic base will have been completed in some of them over the next several years. Development of this type and on this scale raises several important policy issues. In many instances of similar kinds of transformation elsewhere in the world (typically unplanned transformations), powerful economies of agglomeration serve to focus and to reinforce development in and around a few growth poles. The factors at work include traffic routing and rail communications, power supplies, storage and ancillary facilities, skill development and upgrading opportunities for the work force, specialist facilities and repair trades. The interaction of these factors over time tends to result in the creation of secondary towns. 4.54 China seems thus far to have adopted a different course whereby each unit from the brigade level up has embarked on its own industrialization program using internally generated collective savings. The question is - 102 - whether significant benefits of the type described above, as well as those associated with the development of industry around rural growth centers, are being sacrificed under the present policy. And is there significant economic wastage, for example, in the duplication of facilities and in the competition for limited raw material resources and ancillary requirements (marketing, roads, material supplies and facilities) under the current policies? Or, on the other hand, are there significant savings - through avoidance of substan- tial outlays in urban infrastructure, transportation facilities, housing and amenities - under the current highly decentralized strategy that offset such costs? These sorts of questions are important given the current stage of development of rural industry. The answers probably require local level research; local spatial planning should be based on the findings of such research. 4.55 Agricultural Development and International Trade. The authorities are now making greater use of the potential of international trade in agri- culture, both to ease critical bottlenecks and shortfalls in domestic produc- tion, and to seize favorable export market opportunities for specialty crops as well as more traditional export items. The recently developed system of contracting with supplier brigades, communes or even counties at negotiated prices (via the specialized import-export companies) appears a very appropri- ate initiative in this regard. During 1976-79, the annual average increase in volume terms for a range of the more important export items was more than 5% for frozen pork, 6-10% for rice, groundnut oil and kernels, and fruits, 11-15% for filature silk, soybeans and canned fruits, and 21-28% for tea and hides. 4.56 More generally, with a long seaboard and often congested internal transportation facilities, a rather significant trade in agricultural products is certainly justified on economic grounds - probably considerably more than the current volumes of trade indicate. Market knowledge and international trade contacts still appear to be at a development stage. The use of economic principles in seeking out profitable trade expansion is also still to be fully developed. These subjects merit special study. Comparison of trade quota- tions for imports and exports with domestic procurement prices and production costs (together with transport/marketing/distribution margins) would surely suggest how international specialization and comparative advantage can be further utilized in planning agricultural development in China. Such an approach has considerable merit in considering some of the larger questions (e.g. grain versus cotton and oilseed production) particularly since much of the agricultural land where these crops can be rather easily substituted for one another is, in fact, located in the eastern and northeastern seaboard provinces, which serve large urban markets and have good international as well as internal access. 4.57 China's agricultural trade continues to undergo rapid change. From late 1972 onward, both the scope and annual variability of agricultural imports increased. Grain imports rose sharply in 1973 and 1974, and the first significant purchases of soybeans and soybean oil came in 1973. Grain imports reached record levels in both 1978 and 1979, and soybeans and soybean oil - 103 - imports were significant in 1977-79. China has recently become the world's largest importer of cotton. Looking ahead, agricultural trade will be determined by a complex set of economic and policy variables. Demand growth will be influenced by income gains and the extent to which the authorities permit these to be translated into increased demand for meat. This, in turn, will add to the demand for grain. Demand for imported cotton, grains and soybeans may fluctuate more widely than in the past as marginal areas (such as the commodity bases of the northeast) are brought into production. All of these developments have important implications for global price variations in view of China's relatively large purchases on world markets. To a significant extent, the volume and stability of future world trade in grains and fibers will be determined by the performance of China's agricultural sector. 4.58 Investment Strategy in Agriculture. The Government's stated intention is to treat agriculture (together with light industry) as a priority sector, so that unlike some other activities, planned investment may be expected to increase rather than to decrease. In the short term, the share of agriculture in the state capital construction budget (the source of financing for large schemes and investments) is scheduled to rise to 18% (1980-82) from 14% in 1979;/l "support to agriculture" (including small schemes, research, extension and other service costs) would increase from 6.3% in 1979 to 8% (1980-82) of total annual expenditures. Credit for agriculture is planned to double by 1985 from that in 1978. The recent large increases in brigade and commune enterprise outputs, and the increased profitability of collective agriculture (following the substantial 1979 increase in procurement prices) should also result in increased cash for investment from local sources. 4.59 Based on discussion and mission observations in the field, three general comments are offered. First, the increased emphasis on agricultural credit to complement local savings is entirely in keeping with the general thrust of the recent reforms, which is to emphasize increased local autonomy and decision-making powers. There is a strong presumption, based on worldwide experience, that decisions involving credit which is to be repaid at positive real interest rates will be carefully considered and generally prudent. It seems particularly appropriate that modern production inputs be financed largely via the credit system, to allow fully for the local appraisal of returns and costs. Other important activities that can be further developed and stimulated through credit include the small hydropower and biogas digester programs. These are likely to expand considerably in an effort to conserve fossil fuel sources and to meet growing demands for power and fertilizer in the countryside. Moreover, the efforts and attention of senior local officials can then be better concentrated on any major term investments that are proposed (for example in brigade enterprise), as well as on activities /1 Some of these objectives may be affected by the further adjustments and measures currently being taken to reduce the budget deficit. - 104 - that would continue to fall outside the credit network (such as major irri- gation development, flood control and roads). By virtue of well developed collective institutions, including the local credit associations, as well as collective agriculture, the Agricultural Bank could become a relatively low cost credit delivery mechanism. The bank itself, in terms of staffing and institutional development, may well merit some priority as a channel for larger financial flows to Chinese agriculture. 4.60 A second general observation is related to the large class of investments in agriculture that will continue to fall mainly outside the credit network, including much large scheme expenditure, which comes out of the capital construction budget. The historically important programs in water conservancy, agricultural machinery, chemical fertilizer supply and reclamation will all warrant continuing substantial efforts in the 1980s. Local transportation improvements (through road construction and upgrading) and marketing infrastructure are additional areas where perhaps more effort and investment will be required than in some past periods. Despite substan- tial achievements, there is evidence of considerable waste associated with duplication of facilities at the local level and schemes that, however well they function in technical terms, continue to rely on some specially favorable financial arrangement to be financially viable. (A good example may be the low pricing of power used by some high lift pump irrigation systems.) There is a strong case for more systematic review of the prospective costs and benefits (measured in appropriate economic magnitudes), at least for the major schemes, before final approval is given. The techniques of "cost-benefit analysis" are now fairly well developed and they can be applied to virtually any type of project whose main purpose is to generate economic returns. A capability to carry out analysis of this type should be developed in China as a priority. 4.61 A third point is concern about the capacity to quickly augment the supply of trained manpower that is needed for the new and perhaps more challenging programs in agriculture now being contemplated. No new graduates in agricultural science, for example, will become available before 1982, and postgraduate programs are only now getting under way after a long hiatus. The problem of cadres in leading positions who are well past normal retirement age is a cause for considerable concern in China. But there are few middle level trained professionals to take their places. How serious this problem may become as a constraint to effective development planning is difficult to assess, but the shortages are severe. The capacity to implement the various programs must be a factor in their design (including decisions about the use of sophisticated technology, of types new to China) and in the decision to go ahead with, or to defer, any given proposal. Carefully selected foreign technical assistance can also be helpful. Meanwhile, extraordinary efforts to alleviate the manpower shortage should be encouraged through agricultural training and related programs. Annex D Challenges and Achievements in Industry Contents 1. PAST GROWTH AND RECENT OUTPUT . . . . . . . . . . . . . . . . . . 109 A. Past Growth . . . . . . . . . . . . . . . . . . . . . . . . . 109 B. Gross Output by Branch of Industry. . . . . . . . . . . . . . 115 C. Selected International Comparisons. . . . . . . . . . . . . . 119 2. STRUCTURE AND ORGANIZATION . . . . . . . . . . . . . . . . . . . 127 A. Overview by Broad Classes of Enterprises . . . . . . . . . . 127 B. Organization and Management . . . . . . . . . . . . . . . . . 132 Central Control and Coordination. . . . . . . . . . . . . . 132 External Supervision of Enterprises . . . . . . . . . . . . 134 Management of Enterprises . . . . . . . . . . . . . . . . . 137 Enterprise Plans and Incentives . . . . . . . . . . . . . . 138 C. Size and Regional Pattern of Industry . . . . . . . . . . . . 141 Scale of Production . . . . . . . . . . . . . . . . . . . . 141 Regional Patterns of Industrial Development . . . . . . . . 144 3. RECENT CRANGES IN POLICY . . . . . . . . . . . . . . . . . . . . 147 A. Reassessment of Past Policies . . . . . . . . . . . . . . . 147 B. New Policy Framework . . . . . . . . . . . . . . . . . . . . 148 C. Implementation of the New Policies . . . . . . . . . . . . . 149 4. STRENGTHS, WEAKNESSES AND PROBLEMS . . . . . . . . . . . . . . . 158 A. The Chinese Authorities' Appraisal . . . . . . . . . . . . . 158 B. Mission Findings. . . . . . . . . . . . . . . . . . . . . . . 160 Efficiency in Production . . . . . . . . . . . . . . . . . 161 Product Designs, Production Technology and Labor Skills . . 163 Pollution and Environmental Impact. . . . . . . . . . . . . 165 Management and Decision Making . . . . . . . . . . . . . . 166 The Price and "Signal" System . . . . . . . . . . . . . . 166 Compensating Strengths . . . . . . . . . . . . . . . . . . 167 5. ISSUES AND CHALLENGES . . . . . . . . . . . . . . . . . . . . . 168 A. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . 168 B. Energy Conservation . . . . . . . . . . . . . . . . . . . . . 169 C. Raw Materials for Consumer Goods. . . . . . . . . . . . . . . 172 D. Manufactured Exports. . . . . . . . . . . . . . . . . . . . . 175 E. Technology Acquisition . . . . . . . . . . . . . . . . . . . 176 F. Restructuring . . . . . . . . . . . . . . . . . . . . . . . . 1/8 G. Reforms and Improved Management . . . . . . . . . . . . . . . 178 H. Price and Tax Reforms . . . . . . . . . . . . . . . . . 179 - 107 - - 108 - TABLES IN TEXT 1.1 Aggregate Indicators of Industrial Output Growth, 1952-79 . . 110 1.2 Leading Industrial Products: Physical Output and Growth Rates, for Selected Years and Periods (1952-80) . . . . . . . . 114 1.3 Trends in Gross Output, Fixed Assets and Labor Force in Industry, and Associated Indices, 1952-79 . . . . . . . . . . 116 1.4 Value and Growth of Output, 1979, by Branch of Industry . . . . . 117 1.5 Percentage Shares and Per Capita Value of GDP from Industry and Manufacturing: China (1979) and Other Economies (1978) . 120 1.6 Selected Physical Comparisons of Industrial Output in China and India . . . . . . . . . 2 . . . . . . . 122 1.7 Percentage Composition of Gross Industrial Output: China and Other Countries . . . . . . . . . . . . . . . . . . . 124 1.8 Percentage Composition of Gross Manufacturing Output . . . . . . 126 2.1 Aggregate Industry Statistics by Ownership, 1979 . . . . . . . . 128 2.2 Economy-wide Statistics for Light and Heavy Industry, 1979 . . 129 2.3 Employment, Wage Bill and Average Wage per Worker in State Enterprises, 1979 . . . . . . . . . . . . . . . . . . . 131 2.4 Motor Vehicle Production in the Most Important Plants, 1979 . . . 143 2.5 Geographical Pattern of Gross Industrial Output, 1979 . . . . . . 145 3.1 Manufactured Export Trends, 1976-79 . . . . . . . . . . . . . . . 152 3.2 Trends in Investment in Capital Construction by Industry, 1977-79 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 1. PAST GROWTH AND RECENT OUTPUT A. Past Growth 1.01 China's manufacturing industries /1 have made enormous advances since 1949. Today, though not without weaknesses, they have impressive capabilities and turn out a remarkable range of products. Even taking into account the high priority given them and the costs of their development, their advances are a huge achievement. 1.02 According to official estimates, gross industrial output has in- creased in real terms more than forty-fold since 1949, implying an average growth rate of over 13% p.a. If the 1949-52 recovery period is omitted, the rate for 1952-79 is 11.1% p.a. Especially swift growth was achieved in the early years of reconstruction and recovery (nearly 35% p.a. from 1949-52) and on through the First Five-Year Plan (18% p.a. from 1952-57). Thereafter, growth slowed; but in 1957-79, despite all setbacks, gross output continued to grow at nearly 10% p.a. (Table 1.1). Results for 1980 show an increase of 8.7% over the 1979 figure. Net output in current prices has grown more slowly than gross output in constant prices,/2 at rates averaging 8.6% in 1957-79 and a little less since 1970. But in real terms this growth may have paralleled that of gross output, since there has been a slow downward drift /1 Statistics for manufacturing cannot be completely separated from those for a wider group of activities that come under the heading of "industry" in China. This heading covers manufacturing, electric power, mining and mineral extraction, logging and transport of timber, and the many services provided to workers and staff within Chinese industrial enterprises. Chinese data for industry (and for gross industrial output) cover all state enterprises and, in addition, urban collective and commune-owned rural enterprises that meet three tests: they have at least ten workers (though they may be handicraft cooperatives); they have buildings and equipment; and they operate at least three months per year. (However, in rare instances significant enterprises are counted that do not strictly meet all these tests.) Output from rural industrial enterprises owned by production brigades or production teams, and from commune enterprises too small or seasonal to meet these tests, is counted in agricultural output, while manufacturing output on a very small scale within such units as households or service enterprises (e.g., tailoring, repairs, or the smallest food processing operations) generally goes unrecorded. /2 It is not clear conceptually how to deflate net output when a substantial share consists of indirect taxes (para. 1.05 below) . Adding to this difficulty, for years prior to 1970, the only available information on price trends comes from implicit deflators and thus depends on the reliability of the gross output series. Price indices and deflation are discussed further in the Appendix to Annex A. - 109 - - 110 - Table 1.1: AGGREGATE INDICATORS OF INDUSTRIAL OUTPUT GROWTH, 1952-79 Net output in Index number of gross output current prices in constant prices (Y billion) (1949 = 100) Excluding Including Heavy Light brigade brigade industry industry Total industry industry Year 1952 329.7 214.6 245.0 11.7 12.2 1957 1,024.3 393.2 560.0 25.4 26.0 1965 2,144.9 739.2 1,108.8 50.4 n.a. 1970 4,252.9 1,104.9 1,925.8 77.0 78.3 1975 6,896.6 1,602.0 2,980.3 112.7 n.a. 1977 7,922.2 1,875.0 3,450.7 119.7 n.a. 1978 9,158.1 2,077.5 3,916.5 138.5 143.5 1979 9,863.3 2,276.9 4,249.4 155.0 160.9 Average Growth Rates (% p.a.) 1952-79 13.4 9.1 11.1 10.0 10.0 1952-57 25.4 12.9 18.0 16.8 16.3 1957-79 10.8 8.3 9.6 8.6 8.6 1957-65 9.7 8.2 8.9 8.9 n.a. 1965-75 12.4 8.0 10.4 8.4 n.a. 1975-79 9.4 9.2 9.3 8.3 n.a. 1957-70 11.6 8.3 10.0 8.9 8.9 1970-79 9.8 8.4 9.2 8.1 8.3 Sources: Annex A, Appendix Table A.4, and Annex B, Table 2.3. - 111 - of industrial prices since 1957, with some being reduced while others have remained unchanged./l 1.03 The broad picture of rapid and remarkable growth suggested by these series is confirmed by all available evidence. However, there may be mild upward biases in the growth rates given in the official series, since Chinese prices and accounting conventions give heavier weight to fast growing sectors. Prices of industrial products are almost certainly higher on average, by international comparative standards, for the newer products whose output has grown fast than for old ones whose output has grown more slowly; and there are problems in creating links in the series where products change. Accounting conventions used to compute gross output are almost certainly biased toward greater multiple counting of output in fast-growing industries such as iron and steel, machine-building, petroleum and chemicals, particularly as a result of the links between them;/2 but there is much less multiple counting in slow-growing, older industries such as food and agricultural processing. Indeed, by contrast to the practice in many other countries, gross output does not include the value of the raw materials used in such activities as grain milling, slaughtering, and cotton ginning, except in the largest urban enterprises. 1.04 A further problem is that over time, and as a result of changing priorities and technologies, the output mix has shifted, as has the relation- ship between final output and intermediate inputs such as steel, coal or electricity. In some years more than others, a significant share of output has remained unused or unuseable and gone into stockpile buildup or has been otherwise wasted (construction projects never finished, excessive consumption of materials, etc.). Thus, trends in useful final output may have diverged from those in measured output. In addition, because gross output has been treated as a leading target at all levels, many reporting units, faced with choices in their product mix (specification and variety of output), produc- tion methods, accounting of their costs, and the valuation of unstandardized /1 Industrial prices have declined slightly on average, by less than 1%, since 1970; for a large sample of large and medium-sized state enter- prises, according to the State Statistical Bureau (SSB), gross output in current prices was Y 198.4 billion in 1979, compared to Y 199.7 billion in the 1970 accounting prices more commonly used. Judging by data for enterprises visited, the principal price declines have occurred in machinery prices; in a few enterprises producing machinery, gross output was more than 15% lower valued in current prices than in 1970 prices. /2 For example, the iron that is turned into steel, or the oil that is turned into petrochemicals and then synthetic fiber, is counted at each processing stage. - 112 - products (which is often done on a "cost plus" basis), have probably tended to make choices that have raised their measured gross output performance; and the frequency and statistical weight of these biased choices has almost certainly fluctuated over time as policies have changed./1 1.05 Net output, too, is a peculiar measure./2 About one fourth consists of labor costs, which were held down from 1957-77 by granting almost no wage increases (in contrast to increases before and since). Because, with minor exceptions, there is no charge for use of capital, most of the remainder (over two thirds of net output) is indirect taxes and planned profits designed to serve as indirect taxes, based on prices that do not reflect demand and supply but make profits seem higher in some industries than in others. Compared to market economies, these price markups and indirect taxes at successive stages of manufacturing are relatively high, while price markups and indirect taxes in commerce are generally small, with the effect that much of the national income shows up as net output in industry rather than services. Low prices of foodstuffs and most services in China add to the relatively heavy weight of industry. As a result of these price and tax patterns, trends in net output are not a reliable indicator of trends in real output (though they are sensitive to trends in cost efficiency). Indeed, Western concepts used in national accounting and in aggregating output were never designed for such a price and tax system, so inferences based on these concepts may be misleading. 1.06 The achievements of China's industries, and their rapid expansion from 1952 through 1979, are vividly illustrated by increases in the physical /1 Recent growth rates of gross output are subject to some of the same diffi- culties. For example, there has been a rapid growth of petroleum-based products, such as synthetic fibers and plastics, that are assigned high prices and are counted at successive stages of processing. However, useful output has almost certainly increased as a share of the total in 1979 and 1980. /2 Net output is computed on the basis of an accounting identity, as the sum of taxes, profits, wages, interest, and management fees. Depreciation is not included. The wages include those of people primarily engaged in services within the enterprise (e.g., health personnel, teachers, nursery attendants, cooks, and full-time students), whose output is not included in gross output. Other welfare service expenditures (including pensions) are treated in some circumstances like other costs, and in others they come out of profits. - 113 - output of particular products (Table 1.2)./l In nearly all products shown, the rate of growth has been lower since 1957 than in 1952-57, but most branches of industry have achieved vigorous expansion since then, despite the setbacks of the Great Leap Forward (1958-60), the withdrawal of Soviet assistance (1960), and the years of intermittent turmoil associated with the Cultural Revolution (1966-76). In fact, though the post-1966 events disrupted output growth in some years not included in the table, their negative effects on physical output growth are not obvious in the table itself. 1.07 The neglect of consumer goods industries over long periods, now being criticized in restrospect, is also not obvious from the table. By standards of more advanced countries, per capita production of most consumer items remains very low, but considerable gains have been made, as can be seen from the swift advances in light consumer engineering products such as bicycles, radios and watches. The gains made in these and other consumer goods in 1979 and 1980 have been spectacular, however, both absolutely and by comparison with all earlier periods. Meanwhile, in 1980 output of seve- ral types of capital goods was sharply reduced to match demand, while production of fossil fuels declined (paras. 3.07-3.13). /1 The dimensions of China's output in some other light industry products in 1979 are given below: Garments .................. 744 million units Woolen blankets ........... 6.9 million units Footwear .................. 503.3 million pairs (incl. 116 million of leather and 180 million plastic) Canned food ............... 0.501 million tons Dairy products ............ 0.054 Soap ...................... 0.753 Cigarettes ................ 651 billion units (1980 = 760 bln units) Clocks .................... 19.78 million " Wines & alcoholic bev. 3.1 tons of which beer 0.52 " " (1980 = 0.688 mln tons) Leather hides (oxhide equivalent)/a.............. 30.8 million units of which pigskins ....... 44.22 " " /a Two pigskins or six sheep or goat skins are counted as equivalent to one oxhide. Sources: Ministry of Light Industry, State Economic Commission, and communiques on plan fulfillment in 1979 and 1980. - L16 - таЫе 1.2: 1.цDIHC ц1DO81HIAL PHODUCTS: PIIYSICAL ОИРUТ ANO СНОЧ78 цТЕ9, PUB SEL6CTLD УЕАН8 А1т PHHI008 (1952-80) � РЬувlеаl ОиСрΡ с СгоvсЬ Нв[ев оЕ Ph в1са1 Оис и[ . Un1t 33$'�L�S7 -L3S$�D7)Г-I37'S-L3T)�47A-S9i�L9SU - - - А. Aeevy IDdus[ry Ргодиссв Стиде еоаl т1п гоав бб 131 232 354 482 550 ЫВ Ы5 620 14.7 7.4 7.6 7.6 7.1 -2.4 Сгиде о11 m1n tone 0.46 1.46 11.Э1 30.65 77.ОЬ 9Э.Ь4 106.05 106.15 105.95 27.1 21.5 29.2 21.1 8.3 -0.2 Netural gae т1п е 8 70 1,112 2,670 8,В50 12,120 13,730 14,510 14,270 54.3 27.4 . 41.1 20.1 20.6 -1.7 Еlесггlсl[у Ып kЧh 7.3 19.3 67.6 115.9 195.8 Т23.4 256.6 282.0 ЭОО.б 21.5 1Э.0 17.0 11.2 9.5 б.б Ptg lкоп т1п еопе 1.9Э 5.9б 10.77 17.06 24.69 25.05 34.79 36.73 38.02 25.2 8.6 7.7 8.6 10.7 3.5 Scee1 m1v tоав 1.Э5 5.35 12.23 17.79 23.90 2Э.74 Э1.78 36.68 Э7.12 31.9 8.8 10.9 6.9 9.6 7.7 Ro11ed асееl т1л сопв 1.06 4.15 В.В1 11.88 16.22 16.ЗЗ 22.08 24.97 27.16 31.4 8.5 9.9 6.3 11.4 8.В Coke (machlne-made) т1л Соое 2.22 5.55 12.03 19.16 27.38 26.83 Э2.38 33.54 Э6.05 20.1 8.5 10.2 8.6 5.2 1.5 Cement в1п tovв 2.86 Ь.ВЬ 16.34 25.75 46.26 55.65 65.26 7Э.90 79.86 19.1 11.4 11.5 11.0 12.0 8.l Р1а[е glдвв т1п всд.савев 2.13 4.62 Ь.Н7 10.53 ц.SЭ 16.97 20.06 23.Э0 27.71 16.7 7.6 5.1 7.8 12.5 18.9 rimber т1п с 11.20 27.87 39.78 Э7.82 46.26 49.67 51.62 54.Э9 53.59 20.0 3.l 6.5 l.5 4.1 -1.5 Sulphurle асlд '000 сопа 190 Ы2 2,360 2,914 4,847 5,375 б,Ы 0 6,998 7,660 27.2 11.5 17.8 7.6 9.6 9.1 Sode aeh "000 toaa 192 506 882 7,077 1,243 1,077 1,329 1,486 1,Ы3 21.4 5.0 6.4 4.l 4.6 8.5 Свив[1с вода '000 сопе Т9 198 556 892 1,289 1,Э86 1,660 1,826 1,923 20.2 10.6 13.8 8.8 9.l 5.3 Chemlcal Еегс111:ег "000 сопе of Э9 151 1,726 2,435 5,241 1,2Э8 8,693 10,Ь54 12,320 31.1 21.Э 35.6 11.8 19.4 15.7 nucclente Chmlcal lпеесtlсlдев '000 [one 2 65 19Э 321 422 657 5ЭЭ 53Т 537 100.6 10.1 14.6 8.1 6.2 0 Р1васlсе '000 tona 2 1Э 97 176 330 524 679 797 898 45.4 20.5 28.6 1Э.0 • 24.5 1Э.2 Ethylene '000 [опа 0 0 З 15.1 Ь5 303 3Н0 435 490 - - - 36.0 60.8 12.6 Саlсlит сагЫде '000 [опв 1L 49 440 696 983 989 1,2ЭВ 1,607 1,520 34.8 16.5 Э1.б 8.6 9.4 8.0 RиЪЬет сlтев '000 420 880 2,Э20 6,250 7,000 7,720 9,360 11,688 11,660 15.9 12.5 12.9 11.7 1Э.7 -2.0 Рокг generecing equlpment !М 6 198 68Э 2,918 6,965 3,181 4,838 6,212 6,193 101.2 17.0 16.7 21.9 5.8 -J2.5 нlning еаиlраепг '000 гппе 1.8 52.9 40 96.Э 196.1 186.5 242.9 264 163 96.4 7.6 -Э.4 17.2 7.7 -38.3 наеhlпе гооlв '000 13.1 28.0 39.6 138.9 176.9 198.7 18Э.2 139.6 1,360 15.4 7.6 б.б 16.0 (-5.5) - 6.3) носот vehleleв '000 0 7.9 40.5 87.2 139.8 125.6 169.1 185.7 222.0 - 15.4 22.7 1Э.2 7.6 19.6 ттаесотв '000 0 0 9.6 Э1.9 78.4 99.3 11Э.5 125.6 98.0 - - - 2Э.4 12.5 -22.2 Напд tcectore '000 0 0 Э.б 51.4 209.4 Э20.5 324.2 Э17.5 218.0 - - - Ю.1 11.0 -31.6 Internal готЬие2lоп englnee "000 hp 40 690 2,790 7,330 23,480 �27,д10 28,180 29,ОН0 25,Э90 76.7 18.5 19.1 2З.7 5.5 -12.7 Спслтосlvев ипlсв 20 167 l46 573 526 293 521 573 5l2 52.8 5.6 (-1.7) 13.7 2.2 -10.6 Ra11мv рsввеnдет vegonв ипlсв 6 454 l60 576 804 538 784 856 1,002 13Т.6 2.9 (-12.2) 17.5 1.6 17.1 Rallmey frelgh[ авgопв '000 5.8 7.Э 2.9 1Э.8 15.7 6.4 17.0 16.0 10.6 4.7 З.б (-10.9) 18.4 0.5 -36.1 5гее1 вhlрв Еог c1v111an иве '000 гопе 21 1Ф а.в. а.а. п.а. 634 861 809 818 38.7 9.6 - - - 1.1 Н. ,.1ghc Indwtтy Ргодиесв " состп лгп 'ооо сопв бsь saa 1,Эоо z,052 2,1а8 г,23о г,звz 2,635 г,9эо 5.г 5.э 5.s 5.о 5.7 11.4 Сосгоп eloth Ып т 3.83 5.05 6.28 9.15 9.60 10.15 11.03 12.15 1Э.47 5.7 4.1 2.6 4.1 Ь.Ь 10.9 Voolea рlесе goodx л1п т 4.23 78.17 .. .. . 78.40 88.85 90.17 101 3Э.8 7.6 - - - 12.2 811[ '000 cone 5.6 9.9 п.а. п.а. 'а.в. 26.9 29.Т 29.7 35.4 L2.1 5.1 - - - 19.2 511k [едtllев m1n т 65 145 529 611 ЬЬЗ 759 17.4 7.2 - - - 16.5 Cunn7 бage т1л б7 83 125 184 191 245 290 364 633 4.а Ь.7 5.2 6.3 15.8 25.9 Chaslcal flЬегв '000 cone 0 0.2 50.1 100.9 15б.8 189.8 284.6 726 450 - 40.0 99.4 11.9 20.5 38.0 Televfe3on еесе '000 0 0 6.3 10.5 177.8 286.6 517.Э 1,Э29 2,492 - - �- 65.1 65.3 87.5 Надlов "000 17 352 815 Э,108 9,Э56 10,494 11,691 1Э,810 Э0,040 83.3 1e.2 11.1 27.6 10.2 117.5 Сакгае '000 0 0.1 17.2 40.д 184.9 246.6 178.9 2Э8 373 - 62.4 90.3 26.6 6.5 56.7 В1гусlев '000 НО 806 1,838 З,ЬВВ 6,2Э2 7,427 8, ц0 10,095 13,020 59.7 12.2 10.9 1Э.0 12.8 29.0 Sвvlлg олеhlаев "000 Ьб 278 1,2Э8 2,352 3.567 6,242 6,865 5,868 7,680 3Э.Э 14.9 20.5 11.2 13.1 30.8 Чг1еС vа[сЬав '000 0 0.4 1,008 Э,476 7,822 11,063 13,511 17,070 22,160 - 62.Э 166.2 22.7 21.5 29.8 xцMnr..de рврет а рарегЬоагд 372 913 1,7Э0 2,410 Э,410 3,769 4,387 4,929 5,350 19.7 В.О 8.3 7.0 9.6 8.5 5ynehв[ie dat5rgente '000 сопе 0 0 30 9З 223 257 326 397 Э9Э - - - ц.2 15.5 -1.0 L1ght Ьи1Ъв а1п 26 69 192 ЭВЬ 520 617 770 850 950 21.6 12.1 13.6 10.5 13.1 11.8 Sugar '000 сопе a5L 864 1,460 1,350 1,740 1,815 2,267 2,500 2,570 1Э.9 4.9 6.8 1.8 9.5 2.8 satc 'Ооо сопа a,94s в,zп ц,а7о ц,то 14,его 17,104 19,s33 14,7го v,zвa 1о.9 z.7 а.2 2.6 (-0.1) v.a 5оитгае: Staca Lсопоцс Со®1ввlоа, Scste SteC1e[1ca1 Sureau, еиЪаlевlоп [о Unfted На[lопв 8свс3в[1еа1 O1f1ce вад цпhив nevs геlеаве of Аргц 29, 1981. - 115 - 1.08 Throughout the existence of the People's Republic, much effort has been devoted to attaining new technical capabilities. Nearly the entire range of modern industries has been set up, with much emphasis on those making capital equipment. In the past two decades, China has manufactured the bulk of its new equipment for itself. In practically every significant industry, major plants have been created in several parts of the country, and smaller plants have also been established. A widespread machine-building capability has also been fostered by encouraging enterprises and branches of industry to build much of their own machinery and by requiring local units to build many of their own plants. Special efforts have been made to spread manufacturing into backward regions and rural areas. Meanwhile, industrial research institutes and the more advanced factories continually strive to make new products and master recent technologies. As a result, there is a foundation of engineering experience, and a breadth of technical capabilities, unusual in a developing country. 1.09 Quantitative advances, even in periods of political isolation,have been won through a combination of ingenuity and expediency and increased inputs. For example, by using small plants and outdated methods, when difficulties were encountered in building larger plants and mastering newer methods. There has also been a vast expenditure of resources in pursuit of industrial expansion. 1.10 Some data are available on the increases in inputs associated with China's enormous expansion in industrial output (Table 1.3). The gross value of fixed assets in industry, valued (at least since 1949) at original purchase prices, nearly kept pace with output in 1952-57 and then increased considerably faster than gross output after 1957, becoming 42% higher per unit of output in 1979 than in 1957. Thus, output per unit of fixed capital declined. This can be attributed in part to a rising share of output from capital-intensive industries. Meanwhile, the industrial labor force expanded more slowly than output. But labor productivity, which grew at a spectacu- lar 15.4% p.a. in 1952-57, rose in 1957-79 at only 3% p.a. This was based in part on a swift increase in fixed assets per worker. Taking both labor and fixed capital into account, total factor productivity grew rapidly from 1952 to 1957,1 but scarcely at all after 1957. In fact, if fixed capital is given a weight slightly larger than that of labor, the combined factor productivity declined somewhat, and if labor is given greater weight it rose only slightly. In simple terms, this suggests that growth of industrial output in China in 1957-70 was achieved entirely by increasing the quantity of factor inputs and not by increasing the efficiency with which they were used. B. Gross Output by Branch of Industry 1.11 China's classification of branches of industry is based on the Soviet scheme of the 1950s. In showing the gross value of output by branch of industry (Table 1.4), an attempt was made to rearrange industries approximately according to the international classification system. However,, the correspondence remains imperfect. - 116 - Table 1.3: TRENDS IN GROSS OUTPUT, FIXED ASSETS AND LABOR FORCE IN INDUSTRY, AND ASSOCIATED INDICES, 1952-79 /a 1952 1957 1977 1979 Gross output (1949 = 100) 245.0 560.0 3,450.7 4,249.4 Net output in current prices (Y bin) 11.7 25.4 119.7 155.0 Gross value of fixed assets /b (Y bin) 15.8 35.2 n.a. 380.38 Index of fixed assets per unit of gross output (1957 = 100) 102.6 100 n.a. 142.4 Labor force (mln) /c 12.56 14.01 48.09 53.40 Index of fixed assets per worker (1957 = 100) 50.1 100 n.a. 283.5 Index of labor per unit of gross output (1957 = 100) 204.9 100 55.7 50.2 Index of gross output per worker (1957 = 100) 48.8 100 179.5 199.1 Index of total factors per unit of gross output (1957 = 100) (based on weights of 0.6 for fixed assets and 0.4 143.5 100 n.a. 105.5 for labor) (based on reversed weights) 164.0 100 n.a. 87.1 /a Brigade industries are not included in any of the data shown. /b Independent accounting units only. /c Annual average employment in state enterprises rose from 7.34 million in 1957 to 29.57 million in 1977 and 30.38 million in 1979. Sources: Tables 1.1, 2.1; SSB, Ten Great Years, Beijing: Foreign Languages Press, 1960, p. 93, showing fixed assets in 1952 and 1957; and data provided by the SSB. - 117 - Table 1.4: VALUE AND GROWTH OF OUTPUT, 1979, BY BRANCH OF INDUSTRY Gross value Number of of output Growth rate Percentage Branch of industry enterprises (Y million (%) share of (end of 1979) 1970 prices) 1978/79 gross outiut Food, beverages and tobacco (incl. salt mining) 44 682 5l 872 10.0 11.3 Textiles (incl. synthetic fibers) 13,036 59306 12.1 TLY Wearing apparel, footwear and leather products 23,551 13,880 /a 11.1/b 3.0 Sawmills, wood products and furniture 12,683 5,499 11.4 1.2 Paper, pulp and paperboard 4,10) 6,030 12.0 1.3 Paper products, printing, cultural, educational and sports goods 11,256 9,650 /a 16.1/b 2.1 Chemicals, (including mining), rubber and plastic products 22,384 56,184 7.0 12.2 Basic chemicals 2,570 7,221 17.1 (1.6) Chemical fertilizers & insecticides 5,232 10,690 4.8 (2.3) Rubber and plastic producer goods 4,876 11,175 9.1 (2.4) Pharmaceuticals, photo film, fats and oils, soap and detergents 3,238 10,011 0.3 (2.2) Petroleum and coal products 653 16,348 /a 8.9/b 3.6 Petroleum refining and processing 286 15,154 9.4 (3.3) Coal washing and dressing 60 184 5.7/h Coke and coal chemicals 307 1,010 /a 2.4/b (0.2) Nonmetallic mineral building materials 43,495 15,400 9.1 3.3 Cement and cement products 9,927 6,003 23.1 (1.3) Refractory materials, ceramic, brick, lime, etc. 32,941 8,119 0.6 (1.8) Glass 627 1,278 15.8 (0.3) Basic metallurgy and metal mining 5,138 41,027 11.1 8.9 Iron and steel, and iron mining 2,828 28,702 /a 12.0 (6.2) Nonferrous metals (incl. mining) 2,310 12,325 /a 9.3 (2.7) Machinery, equipment and metal products (including repair) 104,071 124,484 7.7 27.1 Agricultural equipment 9,608 10,913 -5.8 (2.4) Industrial machinery and equipment 7,786 24,027 -5.9 (5.2) Transport equipment, except bicycles 2,842 14,542 14.3 (3.2) Construction and road building machinery 238 826 49.4 (0.2) Machinery for nonproduction use 1,871 6,040 18.3 (1.3) Other manufacturing (and piped water) 48,421 16,993 /a -3.3/b 3.7 Logging and transport of timber 1 569 2 976 6.1 0.6 Coal mining 8,805 11,62 1.1 2.5 Petroleum and natural gas extraction 21 9,803 3.4 2.1 Nonmetallic mining for bldg. materials 2,527 1332 4.4 0.3 Electric power 2672 9.5 3.8 Total 320 460,080 8.5 100.0 /a Approximately within Y 5 million. /b Approximate. Source: Combines two sets of data, one from State Economic Commission, the other supplied by Chinese authorities to the United Nations Statistical Office. - 118 - 1.12 Probably no more than 11% of the total gross output came in 1979 from mining, timber extraction, electric power, gas and piped water, while about 89% (roughly Y 410 billion) came from manufacturing./l However, the share of manufacturing would almost certainly be significantly lower in net output. This is principally because a very large share of the value of gross output in manufacturing represents the cost of purchased current inputs - energy, materials and components - rather than value added (wages, profits, etc.) in the industry itself; but in mining or timber extraction, purchases from outside are relatively less, and the ratio of net to gross output is higher. In electric power, purchased inputs were significant but profit margins in China are reported to be high, swelling net output. Probably the share of net output associated with manufacturing would have been in the order of 80-83%./2 1.13 To go from Chinese statistics on net output from industry to a Western national accounting estimate of gross domestic product (GDP) origina- ting in industry (in the sense of manufacturing, mining and electric power), three principal adjustments are necessary (apart from the almost impossible task of adjusting for the special features of Chinese prices). Depreciation must be added; net output in brigade industries must be switched from agriculture to industry; and the wages of people engaged in services or other nonindustrial activities within industrial enterprises must be reassigned to other sectors./3 The net effect of these adjustments, as they /1 Output of extractive heavy industries totalled Y 29.91 billion, while in salt production, valued at about Y 3 billion, the large majority comes from evaporation rather than mining. /2 That quality and mix (if not accounting quirks) play roles in growth rates expressed in gross value of output can be illustrated by some of the one-year growth rates in Table 1.4. In the petroleum industry as a whole, gross output rose 7% in 1979 - based on a rise of 3.4% in extraction and 8.9% in processing - even though crude oil output only rose 2% and the combined tonnage of leading processed products rose 4.6%. Output of sawmills, wood products and furniture rose 11.4%, when timber output increased in physical units by 5.4%. The value of cement and cement products rose 23.1% when the quantity of cement rose 13.3%. In other instances, the effect was quite different; for example, gross output from coal mining rose 1.1% while physical output of coal increased 2.8%. /3 Strictly speaking, logging should be transferred in full to agriculture, forestry and fishing; an allowance for small-scale industries other than brigade industries should be added; and the adjustment for services might be more complicated (though many welfare expenditures of industrial enter- prises, such as pensions, are transfers); but these are minor. - 119 - have been made in the mission's estimates of the national accounts,/l is to raise GDP from industry to Y 171 billion in 1979, or 43.6% of GDP. If this estimate is roughly correct, manufacturing must have generated about 35% of GDP, at Chinese prices. C. Selected International Comparisons 1.14 China is one of only a few countries in the world that has sustained industrial growth rates as high as 10% p.a. for more than 20 years. (Japan did this from about 1950 through 1973.) Comparative data for 1960-78 show that India and other low-income countries as a group expanded their industrial sectors at about 5% p.a., while middle-income countries had a median growth rate of about 7.5% p.a. The fastest industrial growth in these years came in the Republic of Korea, which averaged about 17% p.a., while among other countries of over 25 million people, only Thailand and Nigeria (with its oil resources) reached 10% p.a., while Turkey achieved a little over 9% p.a./2 1.15 This rapid progress and the peculiarities of Chinese prices make the industrial sector unusually large relative to the rest of the economy. Industry and construction together appear to supply as much as 47% of GDP, and, as already noted, manufacturing about 35%. These are high ratios compared to international standards in market economies, as shown in Table 1.5./3 However, if international prices were used (and indirect taxes were thus excluded as they are in other countries), the shares in China would probably be roughly similar to those in middle-income countries. 1.16 By international standards, China-s industrial output per capita remains small. Valued at Chinese prices and exchange rates, manufacturing output per capita is not much over one quarter of the average (valued in their own prices) for middle-income countries and about 4% of the average for industrialized market economies (Table 1.5). But it is three times higher than the average in low-income countries, and this difference would be greater in a comparison of output from the "organized" manufacturing sector. /1 See Annex A, Appendix Table A.10. /2 See World Bank, World Development Report, 1980, Annex, Table 2. The numbers in this table are for manufacturing and for all industry, defined to include construction, so that Chinese statistics have been adjusted to match. /3 However, the shares in 1978 were 62% and 52%, respectively, in the USSR, and were even higher in several Eastern European countries (World Bank, World Development Report, 1980, Annex, Table 2). Table 1.5: PERCENTAGE SHARES AND PER CAPITA VALUE OF GDP FROM INDUSTRY AND MANUFACTURING: CHINA (1979) AND OTHER ECONOMIES (1978) All Middle- low-income income Industrialized China India countries countries market economies Percentage of GDP from: Industry & construction 47 26 24 34 37/a Manufacturing 35 (est.) 17 13 25 277a US dollars per capita from: Z Industry & construction 120 48 48 425 2,990 1 Manufacturing 90 (est.) 31 26 313 2,180 /a In 1960 these shares were 40% and 30%, respectively. Source: China, mission estimates; other countries, based on World Bank, World Development Report, Annex, Tables 1 and 3. - 121 - 1.17 Table 1.6 presents selected physical comparisons of industrial output in India and China. In heavy industry, the numbers suggest that China's output per person is roughly twice that of India. In consumer goods industries, India's output per person is four times higher than that of China in refined sugar, and roughly equal to that of China in cotton cloth. By contrast, China's output per person is clearly many times higher in consumer engineering products for everyday use. The contrasts are particularly striking in radios, sewing machines, and wrist watches./l 1.18 In terms of total output, China ranks among the world's major industrial countries. The net value of manufacturing production (again at Chinese prices and official exchange rates) is about one seventh that in the USA. In 1979, in terms of quantity produced, China led the world in output of cotton yarn and fabric. It ranked third in output of cement, coal, and sulphuric acid, fifth in steel, and seventh in electric power. By early 1981, its output of radios (at about 3.3 million per month) was second only to that of Hong Kong. China's share of world output in 1979 was about 4.8% in steel and 3.4% in electric power. Comparisons based on physical output of basic intermediate goods are biased in China's favor, however, since manufacturing in China tends to be wasteful of energy and materials (for example, in 1978, the conversion efficiency of primary energy in China is estimated to have been 28%, compared to 51% in the USA and 57% in Japan); and the final products probably involve less fabrication and have a lower average value relative to the materials used than goods manufactured in leading industrialized coun- tries. In some branches of output, moreover, China is still only a very small producer by world standards; for example, its output of motor vehicles in 1979 was only 0.4% of the world total. /1 China-s lead may be ever greater, for example, in TV sets, where India did not report any output. - 122 - Table 1.6: SELECTED PHYSICAL COMPARISONS OF INDUSTRIAL OUTPUT IN CHINA AND INDIA Ratios Physical output China/ China 1980/ India China India India 1978 Descriotion Units 1978 1978 1980 1978 Population (mid-year) m1n 644 952 976 1.48 1.52 Electric power bln kWh 107.06 256.6 300.6 2.40 2.79 Crude steel mln tons 9.948 31.78 37.12 3.19 3.73 Cement m1n tons 19.626 65.24 79.86 3 .32 4.07 Sulphuric acid m1n tons 2.107 6.61 7.64 3.14 3.63 Tractors (10 hp & over) '000 53.088 113.5 98.0 2.14 1.85 Motor vehicles '000 97.5 /a 149.1 222.0 1.53 2.28 Cotton cloth mln m 7.2537b 11.03 13 .47 1.52 1.86 Bicycles mln 3.501 8.54 13.02 2.44 3.72 Wrist watches mln 4.409 13.511 22.16 3.06 5.03 Radios mln 1.919 11.697 30.04 6.10 15.65 Sewing machines '000 245 4,865 7,680 19.86 31.35 Refined sugar mln tons 6.474 2.267 2.57 0.35 0.40 /a In 1978, India produced 46,000 passenger cars, 13,600 buses and motor coaches, and 37,900 trucks (lorries); it also produced 303,000 motorcycles (not counted here). Comparable figures for China are not available, but the numbers of passenger cars and motorcycles are believed to have been much smaller. /b This may not include handloom production, although there is no footnote to this effect in the United Nations statistics. Sources: Table 1.2; United Nations, Yearbook of Industrial Statistics, 1)78 Edition Vol. IT: and World Bank population estimates. - 123 - 1.19 China's employment in industry totalled 53.4 million in 1979, or roughly 63 million including brigade industries (para. 2.09) many of whose workers, however, work in industry only part of the time. These are enormous absolute numbers by international standards. By comparison, in 1976, a total of roughly 60 million workers were employed in industry in western and southern Europe, the USA and Canada taken together, about 49 million in the USSR and Eastern Europe, and fewer than 12 million in Japan./l India's employment in industrial establishments with 20 or more workers, or 10 workers and a power source, was not much more than 7 million. Industrial workers in establishments with 10 or more workers each probably averaged 10-11% of the population in industrialized market economies, 13-14% in the most industria- lized centrally planned economies, around 6% in China and the more indus- trially advanced developing countries, and 1-2% (or even less) in the poorest and least developed countries. 1.20 China's net output per worker in industry, excluding brigade enter- prises, was equivalent to about $1,865 in 1979 (at Chinese prices and exchange rates). Comparisons with other countries are extremely difficult, but the available evidence suggests that this is a low ratio for factories in developing countries. Judging by the UN industrial statistics, only in South Asia is factory output per worker as low./2 But if handicraft workers (who are fewer in China) are counted in industry (as they are in other countries' population census statistics), China's output per worker becomes several times higher than that in South Asia. 1.21 One of the most interesting areas for comparison between China and other countries is the structure of industrial output. International compa- risons (Table 1.7) allow an assessment of the significance of China's indus- trial structure. The figures showing the percentage of output from industries classed in China wholly or, for the chemicals and machinery groupings, primarily as heavy industries, seem to imply that richer economies have a larger share of heavy industry than China, by several percentage points. But this must be qualified by taking into account consumer durables - in /1 Based on UN, Yearbook of Industrial Statistics. Figures do not include the smallest establishments. /2 In most other developing countries, the nearest comparison would be value added per person engaged in manufacturing, measured in "factor values" that exclude indirect taxes, in prices of earlier years, for establishments above a size that varies (in the UN industrial statistics) between countries. In India for 1976, this value added was equivalent to $1,386; in 1977 it was $1,244 in Bangladesh and $2,358 in Indonesia. Table 1.7: PERCENTAGE COMPOSITION OF GROSS INDUSTRIAL OUTPUT: CHINA AND OTHER COUNTRIES United Fed. Rep. of United Rep. of China /a States Germany Japan Kingdom Italy Poland Spain Yugoslavia Korea India Industry branch 1979 1977 1976 1977 1976 1977 1977 1976 1977 1977 1976 Food, beverages & tobacco 11.4 13.4 11.8 12.4 16.5 12.3 16.9 13.9 16.1 15.1 17.8 Textiles 13.0 3.3 3.3 4.7 4.3 6.4 7.3 4.4 6.4 13.4 15.4 Apparel, leather & footwear 3.0 2.7 2.8 1.8 2.5 4.8 5.1 5.1 5.1 6.8 1.4 Wood products & furniture 1.2 3.0 3.1 3.8 2.6 2.4 3.9 2.8 5.1 3.0 0.5 Paper, pulp & paperboard 1.3 1.7 1.0 1.4 1.0 /b 0.6 1.6 1.5 1.4 1.2 Chemicals, rubber & plastic products 12.3 10.8 13.5 11.0 12.4 137 9.2 13.1 8.6 12.0 14.6 Petroleum & coal refining 3.6 6.3 4.1 5.4 5.9 4.9 2.2 7.9 4.4 9.4 5.5 Nonmetallic minerals & products /c 3.4 2.7 3.2 3.3 3.3 5.0 3.9 4.3 3.9 4.1 3.2 Iron & steel, nonferrous metals & metal mining 9.0 6.9 9.4 10.5 7.6 9.9 9.9 16.8 11.3 2.7 10.9 Machinery, equipment & metal products 27.3 34.2 35.4 35.6 31.0 30.5 32.9 20.4 27.0 20.0 18.8 Miscellaneous manufacturing 6.0 6.4 3.8 6.4 6.2 5.1/b 2.1 4.1 4.0 3.9 2.0 Coal mining 2.5 1.1 1.6 0.1 1.9 n.a. 3.7 0.6 1.4 0.9 2.L Petroleum & coal extraction 2.1 3.8 0.4 0.1 0.8 0.8 n.a. n.a. 0.6 n.a. 0.7 Electricity 3.9 3.7 6.6 3.5 4.0 4.0 2.3 5.0 4.6 2.3/d 5.9 Total 100.0/a 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Share in predominantly "heavy industries" /e 64.1 69.5 74.2 69.5 66.9 69.0 64.1 68.1 61.8 56.4 61.7 /a Adjusted to exclude logging. 7W Paper is included in miscellaneous manufacturing. 7- Building materials, but not pottery. 7- 1973; calculations assume the same share in 1977. 7e All those listed below chemicals, except hiscellaneous manufacturing. Sources: Computed from Table 1.4 and UN, Yearbook of Industrial Statistics, 1978 Edition, Vol. I. - 125 - particular, passenger cars for individual use, which are not a factor in China but swell the output of predominantly heavy industry in countries with a higher ratio than China. For a poor country with almost no passenger cars, China may have a high share of its output from heavy industry; but the share is only a little higher than that in India (based on Indian statistics for factories but not smaller establishments or handicrafts, which are mainly in light industry). 1.22 In other ways as well, China's industrial output pattern turns out to be intermediate between those in highly developed countries on the one hand, and those in the Republic of Korea and India on the other. For example, the share of textiles in China's output (13%) is over three times higher than that in the richest countries, and close to that in the Republic of Korea or India. But the share in machinery and metal products (27.3%) is about the same as that in Yugoslavia, substantially above that in India or the Republic of Korea (about 19-20%) but below that in leading industrial countries (31-36%). In many of the other industries, including chemicals and basic metallurgy, shares in large countries are much the same irrespective of their level of development, and China's shares are in no way unusual. 1.23 One industry in which China is somewhat out of line with interna- tional patterns is food, beverages and tobacco, where China's share is slightly below the low end of the range, even though shares could be expected to decline as income rises. This low share could be caused, however, by low prices of foodstuffs, by the exclusion of brigade and very small-scale enter- prises from the Chinese statistics, and by Chinese statistical definitions (para. 1.03), which give less than the usual weight to raw materials used in agricultural processing. 1.24 To extend such a comparison to a wide range of developing countries, it becomes necessary to look instead at the percentage composition of gross output in manufacturing (Table 1.8). China is well below the usual range of developing countries in its share of output coming from food, beverages and tobacco; but its share is well above the usual range in machinery, equipment and metal products. This table helps to emphasize that in contrast to China, few other developing countries make most of their own capital equipment and have their own well-developed steel industries; those that do, such as Brazil and India, have an industrial structure rather similar to China's. Table 1.8: PERCENTAGE COMPOSITION OF GROSS MANUFACTURING OUTPUT Philip- Indo- China /a Japan Brazil Turkey India Colombia Egypt pines Nigeria Kenya nesia (1979) (1977) (1974) (1977) (1976) (1976) (1974) (1977) (1976) (1977) (1977) Food, beverages & tobacco 12.5 12.9 17.7 24.4 19.7 33.8 32.5 36.5 22.7 50.7 43.7 Textiles 14.4 4.9 8.3 13.3 17.1 12.6 23.4 7.6 14.7 4.1 14.4 Apparel, leather & footwear 3.4 1.8 3.3 1.4 1.5 4.9 2.3 2.2 1.7 2.7 1.2 Wood products & furniture 1.3 3.9 4.0 1.5 0.6 1.0 0.9 3.2 4.1 1.6 3.1 Paper & pulp 1.5 1.5 1.7/b 1.5 1.4 2.6 2.0 1.8/b 1.4 1.3/b 0.9 Chemicals, rubber & plastic products 13.4 11.4 } 11.7 16.2 14.9 10.7 12.4 15.6 } 11.9 Petroleum & coal } 20.5 } 19.0 refining 4.0 5.7 } 9.6 6.1 5.2 3.8 12.2 9.3 } /d Nonmetallic mineral building aY materials 3.7 3.3 3.5/c 3.6 3.0 3.5 3.3 3.5 3.9 4.0/c 4.1 Iron & steel 6.6 8.3 } 9.0 9.6 2.6 4.9 4.1 0.1 1 1.2 Nonferrous metals -2.7 2.5 } 2.4 1.9 0.8 2.1 0.4 1.5 } n.a. Machinery, } equipment } 35.7 & metal } products 30.3 37.1 } 18.1 20.8 13.4 11.7 12.2 20.5 11.6 17.4 Other manufacturing 6.2 6.7 (5.3) 3.5 2.1 4.7 2.4 (3.9) 4.5 (3.1) 2.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 /a Mining is assumed to comprise 10% of nonferrous metals, 5% of iron and steel, 2% of chemicals and 1% of food, beverages and tobacco as shown in Table 1.4 above. Including indirect taxes (excluded in some other countries). /b Estimated as half the total in paper and products. 7 Includes pottery and china. /d Statistics for Indonesia do not include this (rather large) industry. Sources: Table 1.4 and UN, Yearbook of Industrial Statistics, 1978 Edition, Vol. I. - 127 - 2. STRUCTURE AND ORGANIZATION A. Overview by Broad Classes of Enterprises 2.01 The basic organizational unit in the industrial sector is the enterprise. This is usually a single plant, often a very small one, but the largest manufacturing enterprises are complexes of several related production units in the same vicinity, under unified management. A basic distinction among enterprises is their legal ownership. The more important ones are owned by the state ("the whole people"). The rest are collectively owned. They include urban collective enterprises and enterprises belonging to rural communes. 2.02 Table 2.1 presents economy-wide statistics on industry in 1979, by type of ownership. At the core of the industrial sector are about 60,000 independent accounting units belonging to the state, with an average of well over Y 5 million worth of gross fixed assets each. These and other state enterprises averaged 371 workers each. Collective enterprises are much smaller, averaging 133 workers and Y 210,000 worth of gross fixed assets in urban areas and about 50 workers and Y 75,000 worth of gross fixed assets in rural communes. State enterprises, though less than one fourth of the total, produced nearly 82% of the net output, compared to 11.7% coming from urban collective enterprises and 6.5% from those belonging to and operated by rural communes. 2.03 Information on the value of assets, profits and taxes is only available for independent accounting units primarily in industry, i.e. not for industrial enterprises subordinate to units primarily in other fields (for example, railroad maintenance and repair yards, printing and publishing units belonging to ministries, or workshops engaged in prototype production or making laboratory instruments within research institutes). In the units covered, which produced 96% of the total net output, the state sector had most of the gross fixed assets (91.1%), circulating funds or working capital (83.1%), net fixed assets plus circulating funds (88%), and profits and taxes (87%)./1 Conversely, the collective enterprises weigh more heavily in employment; together they had 42% of the total industrial employment, compared to less than 10% of the fixed assets. Capital per worker or staff /1 Gross fixed assets are valued on the basis of historical costs, and net fixed assets on the basis of these costs less accumulated depreciation. In the enterprises visited, a majority of the fixed assets consisted of production equipment; the other major items were buildings used in production, repair and maintenance equipment, and welfare and community facilities including workers' housing. Circulating funds are based on an average for the year in current prices and refer almost entirely to the costs of materials and work in progress within the plant, since finished products are sold almost immediately to other organizations. - 128 - Table 2.1: AGGREGATE INDUSTRY STATISTICS BY OWNERSHIP, 1979 Industrial enterprises Collective Total Urban enter- State- collec- Rural prises owned Total tive commune All Industrial Enterprises /a No. of enterprises (end of year) 355,013 83,837 271,176 99,679 171,497 Gross output (billion 1970 yuan) 459.07 371.98 87.09 63.72 23.37 Net output (billion current yuan) 154.54 126.50 28.04 18.06 9.98 Employment (thousands, end of year) 53,400/b 31,091/c 22,300/b 13,277 9,000/b Wages and salaries (billion current yuan) n.a. 23.02 n.a. 6.76 n.a. Independent Accounting Units Only Gross fixed assets (Y billion, end of year) 380.38 346.67 33.71 20.91 12.80 Net fixed assets (Y billion, end of year) 262.97 237.86 25.11 14.96 10.15 Circulating funds (Y billion, average) 133.44 110.87 22.55 17.12 5.43 Net fixed assets plus circu- lating funds 396.41 348.75 47.66 32.08 15.58 Profits and taxes (Y billion current) 99.41 86.44 12.97 8.56 4.41 /a For the definition and coverage, see para 1.01, footnote 1. /b Estimated and rounded. /c Average during the year was 30,381; see Table 2.3 below. Source: State Economic Commission. - 129 - member (net fixed assets plus circulating funds) averaged Y 11,217 in state enterprises but only Y 2,416 (21.5% as much) in urban collective enterprises and about Y 1,730, in those run by rural communes./l 2.04 Industrial enterprises in production brigades are not included in any of these statistics except where noted. According to estimates by the Ministry of Agriculture, at the end of 1979 there were about 580,000 industrial enterprises in production brigades, with a total of 9.73 million workers and staff; their gross output for the year was Y 16,327 million. Thus, brigade enterprises averaged only 17 workers each. Gross output per worker, which was about Y 12,000 in state enterprises, Y 4,800 in urban collective enterprises, and Y 2,600 in commune enterprises, averaged only about Y 1,680 in those of production brigades. However, in both types of rural units, and especially in production brigades, many of the workers spend only part of their time in industry. If brigade enterprises are counted, China in 1979 had over 935,000 industrial enterprises. Only about half of their total employment was in state enterprises, but these produced nearly four-fifths (78%) of the combined gross output. 2.05 In China, the basic structural division in industry is between light and heavy industry (Table 2.2). Light industry includes all consumer Table 2.2: ECONOMY-WIDE STATISTICS FOR LIGHT AND HEAVY INDUSTRY, 1979 Percentage shares Light Heavy Light Heavy industry industry Total industry industry All Industrial Enterprises Number 207,853 147,160 355,013 58.5 41.5 Gross output (bln 1970 yuan) 197.96 261.11 459.07 43.1 56.9 Net output (bln current yuan) 59.13 95.41 154.54 38.3 61.7 Independent Accounting Units Only Gross fixed assets (Y billion) 66.55 313.83 380.38 17.5 82.5 Net fixed assets (Y billion) 45.40 217.57 262.97 17.3 82.7 Circulating funds (Y billion) 37.28 96.16 133.44 27.9 72.1 N.f.a. plus c.f. (Y billion) 82.68 313.73 396.41 20.9 79.1 Profits and taxes (Y billion) 39.46 59.95 99.41 39.7 60.3 Source: State Economic Commission. /1 The absolute figures would be slightly higher in each case, if capital used in enterprises that are not independent accounting units could be computed and added; but the general picture would not be affected. - 130 - goods, food products, processed agricultural products, and textiles, plus many producer goods, for example, pulp and paper, synthetic fibers, and the simpler types of farm equipment./l Heavy industry includes the other manufacturing industries such as steel, cement, and most types of machine building, together with electric power, timber extraction, and all mining other than salt mining. Heavy industry, using nearly 83% of the net fixed assets, produced nearly 62% of the net output in 1979. Its share of industrial employment was slightly over 58%./2 Heavy industry also generated 60% of the profits and taxes from industry. For each Y 100 of capital invested (net fixed assets plus circulating funds), light industry yielded Y 47.7 in profits and taxes, compared to Y 19.1 from heavy industry. The share of profits and taxes in net output appears to have been slightly higher in light industry than in heavy industry. However, net output per person employed was about 15% higher in heavy industry, which also produced slightly more profits and taxes per worker. Despite the sizeable overall profits in industry, about 23% of all state industrial enterprises operated at a loss in 1980. 2.06 In light industry, enterprises in the state sector produced 76% of the gross output of Y 198 billion compared to 24% from collective enterprises, including those belonging to rural communes. The state enterprises numbered about 55,000, employed 8.46 million workers and staff, and had Y 51.6 billion worth of fixed assets. This means that in heavy industry, 85% of gross output came from state enterprises and 15% from collective enterprises. It also implies that state-owned enterprises in heavy industry numbered fewer than 30,000 (about one third of the total) but produced about 60% of the gross output in the state sector. To do this, they employed over Y 295 billion in gross fixed assets (85% of the total assets in the state sector) and about 22 million workers (72.2% of the state sector-s average employment during /1 Among the other products classed under light industry are goods for pro- duction (or military) use made from wood, bamboo, rattan, natural and synthetic fibers, textiles, paper, paperboard, furs or leather; machinery and equipment for medical and cultural use (including, for example, typewriters, motion picture equipment, and small calculators); metal products for construction and packing use; craftsmen's and other hand tools; industrial fats and oils; paints and varnishes; dyes and mordants; soaps and detergents; camera film; salt chemicals; pharmaceu- ticals and piped water. However, every aspect of the motor vehicle industry, including repairs, is counted as heavy industry. A comparison of Table 2.3 with Table 1.4 reveals that over two-fifths of the 104,000 enterprises in machinery and metal products, and a large share of those in chemicals, rubber and plastics products, must have been counted as light industry. /2 This is an inference from data cited in paras. 2.06 and 2.08, and implies that there were roughly 31 million workers and staff in heavy industry, - 131 - 1979). These numbers imply that in the state sector, heavy industry possessed nearly twice as much fixed capital per worker as light industry, but produced only about half as much gross output per worker. 2.07 In state industrial enterprises, over half of the work force in 1979 was employed in "machine building" (including metal products, transport equipment, instruments and electronics), coal mining, and basic metallurgy (Table 2.3). The highest average wages were paid in the coal mining sector (perhaps because of health hazards) and the lowest in the food industry. The average wage of Y 758 in state industrial enterprises compares to perhaps Y 520 in urban collective enterprises. (Average wages in the rural commune and brigade enterprises must in turn have been considerably lower than those in urban collectives.) Table 2.3: EMPLOYMENT, WAGE BILL AND AVERAGE WAGE PER WORKER IN STATE INDUSTRIAL ENTERPRISES, 1979 Average annual Average employment Wage bill wage (000) (Y m1n) (Y/year) Electric power 786 577.56 735 Coal mining, washing and dressing 3,770 3,422.89 908 Petroleum extraction and refining 478 413.04 864 Basic metallurgy (incl. mining) 3,012 2,454.95 815 Chemicals (incl. mining), plastic and rubber products 2,815 1,965.30 698 Nonmetallic mineral building materials (incl. mining) 1,857 1,308.91 705 Machinery and metal products 9,175 6,723.45 733 Timber and wood products 1,200 1,039.19 866 Food products, beverages and tobacco 2,006 1,329.86 663 Textiles 2,740 1,981.75 723 Paper, pulp and paperboard 410 296.35 723 Other industries 2,132 1,505.66 706 Total 301381 23J018.91 758 Source: Data supplied to UN Statistical Office. - 132 - 2.08 Of the collective enterprises (excluding brigade enterprises), nearly 120,000 must have been in heavy industry and over 150,000 in light industry. Enterprises in heavy industry had a majority of the fixed assets (about Y 19.8 billion compared to Y 13.9 billion in light industry) and produced about 45% of the gross output. A little less than 40% of their employment was in heavy industry and slightly over 60% in light industry. There is also a significant share of heavy industry among the enterprises belonging to production brigades; for example, they must have included over 80,000 of China's 90,000 small hydroelectric stations and about 12,000 small coal mines./l B. Organization and Management Central Control and Coordination 2.09 The major institutions above the ministerial level responsible for coordination in the industrial, transport and communications sectors are the State Economic Commission (SEC), the State Planning Commission (SPC), and offices of the State Council responsible for particular economic functions or groups of ministries. The SEC has prime responsibility for executing the annual plans of these sectors, and thus resolving problems and setting priorities in plan implementation. It is also concerned with associated issues such as quality control, technical standardization, and organization and specialization to improve current production. The SPC draws up and subsequently adjusts the annual plan which, when elaborated at lower levels, governs current production; it also prepares longer term plans. It has the power of approval over major investment projects, which are then carried out under the State Capital Construction Commission. The SEC and SPC, located in the same building, work closely together. Other state commissions contribute to coordination in their more specialized areas of concern. Those most involved in industry are the recently created Energy Commission, the Machine Building Industry Commission, and the Import-Export Control Commission. 2.10 Below these supraministerial bodies, 14 central government minis- tries are primarily engaged in manufacturing. These include eight ministries of machine building,/2 and six others, as follows: /1 This can be deduced by subtracting numbers in Table 1.4 above from the total numbers given in Chinese press reports. /2 The First Ministry of Machine Building is responsible for general indus- trial equipment for civilian use (para. 2.13 below); the Fourth Ministry of Machine Building is in charge of the electronics industry, both civilian and military; and the others are responsible for such industries as shipbuilding, aircrafts, armaments, nuclear programs, aerospace and guided missiles. - 133 - Agricultural Machinery Building Materials Industry Chemical Industry Metallurgical Industry Textile Industry Light Industry The other primarily industrial ministries are those of Coal Industry, Petroleum Industry, Forestry, and Electric Power. 2.11 Industrial enterprises are also found under practically every other ministry (in early 1981 there were a total of 38 ministries) and most other leading government organizations, if only to meet the special needs of each. This is part of a widespread pattern of vertical integration and self-reliance within organizational units. The Building Materials, Chemical and Metallurgical Industry Ministries have their own mining operations. The Ministry of Textile Industry has its own petrochemical complexes to produce synthetic fibers; and it also produces most of China's textile machinery. Practically all ministries have machine-building enterprises, supplying at least some of their own needs for machinery. The Ministry of Coal Industry makes coal mining machinery; the Ministry of Railways makes railway equipment; the Ministry of Geology makes its own geological instruments; the Ministry of Posts and Telecommunications makes telephone equipment; the Ministry of Communications builds ships and other maritime transport equipment; and so on. The Ministry of Education produces its own textbooks and other educational materials. The Ministry of Forestry runs sawmills and particleboard plants. The Ministry of State Farms oversees at least indirectly some 6,100 industrial enterprises on state farms, while the Ministry of Agriculture exercises indirect supervision over commune and brigade industries. Military equipment departments have many factories, some of which produce items now being channeled into civilian consumption such as clothing, footwear, sunglasses and radios. Not infrequently, two or more ministries, as well as regional govern- ments, make similar products at plants designed to serve a specific market; in some cases, the plants may be unaware of the existence of other plants making very similar ranges and types of capital equipment for a different ministry. 2.12 As an example of the sphere of influence of one ministry, the Ministry of Light Industry in 1979 contained 18 industrial departments, each corresponding to a branch of industry, for example, pulp and paper, daily use machinery (bicycles, sewing machines, watches, etc.), pottery and ceramics, food and beverages, chemicals for daily use, leather and shoes, ready-made garments, furniture, plastic materials, metal hardware, arts and handicrafts, or machinery for light industry. Under its supervision were 10,600 state enterprises and 55,600 urban collective enterprises. Their workers and staff totalled nearly 10.5 million including 3.82 million in the state enterprises (producing gross output valued at Y 48 billion) and 6.63 million in the collective enterprises (with gross output valued at Y 36 billion). Net output totalled Y 29.1 billion. - 134 - 2.13 In heavy industry, because of the more direct supervision generally exercised, the sphere of each ministry is narrower. Compared to gross output of Y 84 billion from enterprises under the Ministry of Light Industry, and Y 53.9 billion from those under the Ministry of Textile Industry, the First Ministry of Machine Building was responsible for gross output valued in 1979 at Y 35.89 billion. The six general bureaus under it were heavy and mining equipment, general machinery, machine tools, motor vehicles, electrical equipment, and (temporarily under its leadership) instruments. Enterprises under its supervision produced about 20,000 kinds of products, including 983 new products first made in 1979. Under its responsibility were about 4,240 state enterprises and 2,200 urban collective enterprises, with a total of 3.64 million employees including 148,700 technical people. Fixed assets were valued at Y 30.62 billion (including 463,000 machine tools) and circulating capital, Y 17.1 billion. Net value of output in 1979 was Y 10.76 billion, including Y 6 billion in profit and Y 1.6 billion in taxes. A ministry such as this one, exercising much direct concentrated control over its factories and research institutes, is powerful and bears much responsibility for translating national concerns into programs and priorities for its subordinate units. External Supervision of Enterprises 2.14 The central organization is mirrored, on a smaller scale, in each province or independent municipality. Each has industrial bureaus (Shanghai and Liaoning had 11 each), coordinating officials, and economic and planning commissions, which are guided by the corresponding central organizations, as well as the regional government. The province may decide on relatively small investments, but these must, nevertheless, be approved step by step up to the provincial level and decided there by top planning and economic officials working together. Bigger investments get approval at successive levels and are decided in Beijing. Inevitably, both current production and investments require careful meshing of output and expansion plans by different organizations at the same level, placing heavy burdens on the coordinating and planning functions throughout the system. 2.15 Chinese manufacturing enterprises (both state and urban collective enterprises) are in some ways not unlike separate branch plants within a large company in a market economy. The management gets its assignment, plan and plan targets, capital, marketing, and most of its production inputs from higher levels, which bear the responsibility for the strategy, policies and administrative and accounting procedures followed, as well as all major decisions affecting the medium-term future, such as investments or significant changes in the enterprise's products. Even personnel assigned to the enterprise and wage and compensation plans are decided from the outside. Decisions in these areas reflect the enterprises' capabilities and accumulated financial resources, as well as national policies in force at the time. - 135 - 2.16 Thus the operation and management of an enterprise are greatly influenced by the levels and units that have direct responsibility for supervising it. This responsibility, more often than not, is shared by two organizations which exercise "joint" ("dual") leadership, for example, a central ministry (which may exercise primary leadership in the production of items under its centralized control) and a provincial-level government (which has primary responsibility for some of the other functions that are not so centralized). In other cases there is a single chain of supervision. Enterprises may, for example, be under a county, a neighborhood "street committee" in a city (in the case of a small urban collective), or directly under a regional or municipal bureau in their industry or a central ministry. 2.17 The unit of government that has this supervisory power over an enterprise often acquires a sense of proprietorship from originally starting or at least transforming or expanding it, using its own funds and management efforts, and also from sharing its revenue. Enterprises sometimes change hands, however. In 1958 and again in 1970, many enterprises were shifted from central to regional or local control; and in other periods, and follow- ing these two shifts, widespread changes have taken place in the opposite direction. Enterprises also sometimes pass from one ownership category to another, for example, from collective into state enterprises. Within the last two years many new corporations have been organized as intermediate layers in supervision; many of these are administrative, but some are enterprises comprising several plants. 2.18 Direct supervision includes substantial powers of review and approval over the enterprise's actions, budgets, expenditures, etc. Even if the enterprise is uniquely under a county or central ministry, this means in practice a particular bureau or office in that organization while other bureaus or offices within it also have dealings with the enterprise. Usually at lower levels of a single chain of responsibility (for example, when the enterprise reports to a corporation to which it is assigned), the unit with immediate supervisory power operates much like a wholly-owned subsidiary or administrative branch of the next unit above it (perhaps the provincial no. 2 bureau for light industry). Thus, important decisions tend to be passed upwards and the enterprise must be aware of the chain above. Even when primary supervision is vested in a lower level, a central government ministry helps to make national policy and supervise technical standards throughout the industry. Conversely, the local government has a major influence on decisions involving land use and spatial aspects of industry even in enterprises reporting directly to higher levels of government. Indeed, different types of decisions regularly bring in different actors - labor authorities or financial officials, for example. Thus, enterprises must submit requests through the units above them, which must then go through different institutional channels in each case, in requesting different kinds of workers (manual workers, office and administrative staff, technical or professional workers, and new technical graduates); and little - 136 - success can be expected where these requests call for skilled workers./l The enterprise and those who supervise it must also interact regularly with various other state authorities (planning authorities, supply bureaus, the People's Bank, etc.) most of which are themselves under a sort of "dual leadership," taking much of their guidance from higher levels in their specialty. If an action is important, approvals are likely to be required from several concerned units or organizations, and final approval may have to be sought at higher levels. 2.19 The picture thus emerges that most intermediate organizations routinely depend on procedures and referral of decisions, acting more like subsidiary branch managers than independent centers of decision making. Within the industrial system, however, there undoubtedly exist nodes of concentrated entrepreneurship and decision-making power (somewhat akin to the management of independent companies); these include the top levels of central ministries and the principal coordinating officials in industry within provincial-level governments. Bureaus for particular industries, within ministries or within regional government, also have a substantial influence. Smaller centers with the power to act like virtually independent companies are probably found in major municipalities and in counties. At all levels, however, the art of management requires a highly developed sense of how to go through procedural channels and obtain required clearances. 2.20 The degree of centralization is higher for heavy and defense industries than for light industries, mainly because the heavy industries typically rely on materials or produce output that is centrally allocated on a national basis, in contrast to most of the light industries. Thus, in the "machine building" industries, out of about 17,000 state-owned independent accounting units,/2 some of which are in light industry, no fewer than 12,000 are directly under central ministries. But in most cases they are under dual (joint) leadership with provincial authorities. Only 79 industrial enter- prises under the First Ministry of Machine Building, for example, were under the ministry alone. The Ministry of Chemical Industry had unique control of only two enterprises, and the Ministry of Metallurgical Industry had just fifteen enterprises under its control alone. Central control is found in enterprises that are very large or otherwise strategically important. Conversely, light industry is almost entirely under the direct control of regional or local authorities. The level of government supervising a plant also depends on the technical competence and industrial experience of the local authorities. Except in the largest cities such as Shanghai, enter- prises are generally supervised at a regional level that encompasses most of their market. Small local industries operated by the counties or equivalent units are generally plants using fairly simple technology to serve the local geographical area. /1 See Annex I,"Education", paras. 2.21-2.23. /2 There were in 1979 about 75,000 collective independent accounting units in these industries with gross output of Y 31.1 billion. - 137 - Management of Enterprises 2.21 Enterprise management concentrates on only a narrow range of tasks: production to fulfill the plan (including quality control), maintenance and repair of equipment, trying to assure the timely arrival of inputs needed in production, relationships with workers including their welfare and training, advancing the enterprise's technical know-how and skills, and preparing proposals to higher levels on investments to improve the plant. 2.22 The internal organization of enterprises, after years of management by revolutionary committees, has returned to an older pattern of management organization. A manager is assisted by several deputies, including a chief engineer and a chief accountant. There are usually over half a dozen staff departments, for example, finance and accounting, planning, labor and wages, training, and general administration. Immediately beneath this management level are the workshops (or other production units), whose leaders are closely involved in the production work. Managers keep workers well informed of actual results compared to plans and goals; often results for each team or unit are posted, along with photographs of individuals and teams who have done especially well. Party units within the enterprise help to guide political aspects of management at all levels to assure that workers are responsive to the latest campaigns and instructions. Of course, the pattern of organization varies in details and complexity according to the size, activity, and physical features of the enterprise. The largest manufacturing enterprises such as the Anshan Iron and Steel Company are gigantic and extremely complex./1 2.23 The enterprise supplies many services and welfare benefits to its employees, including prepared meals in the enterprise dining halls, medical care, and retirement pensions. Frequently these benefits include subsidized housing owned by the enterprise (with dormitories for single workers), day-care centers, preschools or even primary schools for workers' children, and recreation facilities (ranging from common rooms to basketball courts and cinemas). To help overcome shortages of education and skills in the work force, enterprises offer adult education and training courses (full or /1 Mines had been separated from the Anshan complex, which nevertheless still had about 130,000 workers and staff in November 1980, organized into about 40 plants (each with its workshops or other production units), and a wide range of supporting facilities, for example research and design institutes, a 2,700-bed hospital, health clinics in each plant, two institutes of higher learning, three technical middle schools, and a school for training technicians, with a total of about 10,874 students, and six after-work training schools (counting short-duration courses, 42.7% of workers were involved in education). - 138 - part time) for workers; sometimes enterprises have their own technical training institutes./1 The workers' representatives have a consultative voice in matters relating to workers' welfare and interests. 2.24 Differences appear between state and urban collective enterprises mainly in wage levels and the way in which profits are divided. Wages in urban collective enterprises are lower - sometimes much lower - than those for similar jobs in state enterprises; and there are substantial regional variations. The formal differences in methods of profit distribution are greater than the end results. In state enterprises, all profits belong in principle to the state; the share controlled by the enterprises is very small, although it has been increased wherever reforms have been introduced. By comparison, collective enterprises pay a graduated income tax, which in the larger enterprises amounts to 55% of the profit after indirect taxes. The remainder is divided according to a formula that varies in detail according to the locality. As of late 1980, the norm in Beijing seemed to be that 40% went to the municipal bureau in the enterprise's field, 30% to the corporation to which it belongs, which is directly under the bureau, and 30% (i.e. 13.5% of total profits) to the enterprise itself. Where an enterprise was especially profitable, this last share was only 20% (9% of total profits). The pattern was much the same in other cities; and if the enterprise did not belong to a corporation, the municipal bureau got a larger share and the enterprise itself still got a minority share. However, in early 1981 a national decision was made to raise the urban collective enterprise's share of its profits after taxes to the range of 50-70%. Much as in the state enterprises affected by reforms, the collective enterprise-s share is divided in turn, with 40-50% being plowed back into productive investments, and smaller, roughly equal, shares used for workers' welfare services and bonuses. The collective enterprise may also be allocated investment funds or working capital, and its losses if any may be funded out of the resources of its bureau or corporation. Enterprise Plans and Incentives 2.25 The annual plan guiding an enterprise-s work is the result of a formal process through which plan proposals, passed down in broad outlines from higher authorities, are fleshed out with details, iterated through suggestions, and finally agreed between planning authorities, the enterprise, and higher levels above it. As part of this cycle, enterprise managers may participate, with their superiors, in conferences (usually twice a year) on their particular industry, in which the potential of suppliers is reconciled with the demands of customers. An effort is made to reach decisions to which everyone assents, so that responsibility for the results is shared and widely /1 The role of enterprises in upgrading workers' skills is particularly crucial in view of the virtual immobility of labor (most workers remain with their first employer) and the fact that enterprises usually get only a fraction of the qualified and skilled staff they request. - 139 - diffused. In briefings and discussions of an organization or a set of pro- posals, the procedure is generally constructive and cooperative but cautious, with everyone sensitive to the (unequal) influence of each actor in the decision-making process. Participants act as technical experts, making their required, objective contributions in the prescribed order. 2.26 In its annual plan (a set of interlocking documents), the enterprise is given targets to fulfill, together with detailed instructions and con- straints on the resources it is to use, how many workers will be employed and paid at each wage rate, etc. The most important targets in the past have been the physical quantity of output (measured, in a multiproduct enterprise, by its accounting value in 1970 prices) and output quality. Recently emphasis has been placed also on profits and, as a new target, the fulfillment of all contracts. Targets also include the variety or specification of output (i.e. the mix produced), consumption of materials, labor productivity, cost, and the amount of working capital used. Some of the secondary targets (such as labor productivity) are essentially redundant once the principal targets are met using the resources available. 2.27 The fulfillment of plan targets is only part of what is being demanded of the enterprise. Additional targets or other concerns may be decreed by the latest policies and campaigns in response to national objectives. Thus, for example, added emphasis has been given recently to saving energy and reducing consumption of scarce raw materials, with specific targets reportedly being conveyed to the enterprise outside the routine planning process. Nevertheless, in practice a great deal of the evaluation enterprise performance and much of the thinking about plans and results, at all levels, appear to be based (not always consciously) on the 1970 prices that measure output and the current prices that measure costs and profits. - 140 - 2.28 The plan gives the enterprise little scope for varying its technology or substituting one input for another. Raw materials and other purchased materials for production are specified, together with their sources and channels through which they are to be delivered. (Similarly the plan specifies the recipients of the enterprise's output.) However, because an enterprise may not receive its planned allocations on schedule, due to production or transportation failures elsewhere, it must cultivate alternative supply channels to provide for such contingencies. The authorities informally permit various types of barter deals among enterprises to cope with these difficulties. Also, plans are often changed and reallocations or reductions made during the year to channel scarce inputs on the basis of revised national priorities. Funds for circulating capital and financing of payrolls, up to limits set in the enterprise's financial plan, are provided by the People's Bank free of interest, while additional funds can be borrowed for working capital - usually at 5.04% interest - under strict controls. Fixed capital to be used in production is inflexible. Additions to plant, new equipment, and even improvements to existing equipment are decided by higher authorities, based on detailed submissions by the enterprise. (Inevitably prevailing prices influence these decisions as well - for example, one finds frequent references to the pay-back period of investments.) A principal change under the reform experiments (which involved 6,600 enterprises as of early 1981, many of them large and important) has been to allow enterprises some funds and latitude to "tap their potentials" by modernizing their own plant and equipment as well as to build added housing, while providing them channels to purchase machinery and building materials. 2.29 Motivation in the enterprise, from managers on down, depends primarily on nonmonetary rewards and peer pressure. Much emphasis is placed on team accomplishments, and individuals are encouraged to internalize socially approved objectives and behavior patterns. Bonuses have been reintroduced, but they are small and tend to be shared nearly equally, with managers getting no more than the average. Any income adjustments are usually given to all workers. A worker's pay is practically never reduced and no one is discharged. Pay differentials within a factory are generally rather narrow and have tended to reflect people's ages and past histories (for example their grade levels in 1957 when wages were first frozen for long periods) at least as much as contrasts in their education and skills. Except for a few older managers, whose salaries still reflect higher salary differentials in the past, Chinese managers generally earn only a little more than ordinary workers, for example about Y 100 a month as compared to about Y 65. - 141 - C. Size and Regional Pattern of Industry Scale of Production 2.30 China is widely renowned for the important role played by rural, small-scale industry, and more generally for the coexistence of enterprises of different sizes, with output from large numbers of small plants being used to supplement that from large and medium-sized ones, which exemplifies the prin- ciple of "walking on two legs." This approach has allowed China to achieve a high degree of self-sufficiency, based on small plants that could be quickly built without foreign assistance. It has also allowed industry to be spread to the countryside in support of agriculture. Recently, however, the role of small-scale industry has been shifting. Many of the small plants built in the past have come to be seen as highly inefficient and as competing for scarce fuel and raw materials with larger, more efficient plants. Meanwhile, an effort is being made to build up efficient small plants in and near the cities, including networks of parts suppliers and labor-intensive light industries. 2.31 In China, enterprises are classified as large, medium sized or small, drawing lines that vary from one industry to the next, based on plant capacity where convenient units exist and value of fixed assets where they do not./1 Chinese sources appear to agree that hardly more than 5,000 enterprises are classed as large or medium sized; some writers suggest there are about 1,200 large and about 3,000 medium-sized enterprises. Together they are said to account for less than half of the total output, with about one fourth coming from the large enterprises./2 2.32 The aggregate importance of small industrial enterprises in China does not seem to be remarkably large by international standards. Other developing countries and many industrialized ones also have many small /1 In steel, for example, an enterprise with an annual productive capacity of over 1,000,000 tons is considered large, one with a 100,000-1,000,000 ton capacity, medium sized, and one with less than a 100,000 ton capacity, small. In paper 30,000 tons capacity is large, 10,000-30,000 tons is medium sized, and under 10,000 tons is small. In general engineering equipment, a plant with over Y 30 million in fixed assets is large, one with Y 8-30 million is medium sized, and one with under Y 8 million is small, but in light industry, in some branches, a large enterprise is one with over Y 20 million in fixed assets. Some of these examples are from Liao Jianxiang, "China's Policy on Simultaneous Development of Big, Medium, and Small Industrial Enterprises, and the Selection of Technology," presented in Madison, Wisconsin, November 1980. /2 The numbers are drawn mainly from the paper by Liao Jianxing, just cited, and one by Xie Shirong, "Discussions on Problems of Chinese Style Moderni- zation," Jingji Yanjiu (Economic Research), No. 1, 1980; but these papers do not appear to be entirely accurate in their discussions of total numbers of enterprises by ownership, so their statistics must be treated with caution. - 142 - establishments. Indeed, China has few specialized urban establishments with only a few people each, while these are common in market economies; and handicraft production was much reduced during the Cultural Revolution. Many of the types of small enterprises found in China today tend to be at least as common elsewhere, for example, those engaged in initial processing of agricultural raw materials, local repair of equipment, handicrafts, parts manufacturing, and those in labor-intensive industries commonly carried out on a small scale, such as garment-making, furniture-making, and many food industries. 2.33 China's smaller enterprises are unusual, however, in that many of them, dispersed throughout the country, are engaged in types of production that are characterized everywhere by large economies of scale. As a result, China has quite an unusual structure of production within particular industries. In cement, for example, there are 49 large and medium-sized plants using rotary kilns, and 25 more are now being built. However, about two thirds of the total output comes from small enterprises using vertical kilns - basically stationary chimneys - where cement is cooked in batches. This technique became obsolete many decades ago in the West, and it presents difficulties in quality control, but in China it has been widely used because it involves low investment costs, is simple to master, and can supply low-strength cement in rural areas where transportation costs are a serious problem. China now has over 3,400 plants using vertical kilns in a wide range of sizes: the 120 biggest ones have production capacities of over 80,000 tons per year each, while about 1,000 run by communes and production brigades have production capacities of only about 2,000 tons per year each. In the cement industry as a whole, energy consumption per ton of cement is roughly double the average in leading industrialized countries, because wet process technology is still used even in the rotary kiln plants built in China. 2.34 In the nitrogenous fertilizer industry, as recently as 1977, nearly two thirds of the output came from over 1,400 small plants, using technology based on partial oxidation using coal, another old technique long abandoned in the West. Typically these small plants have an ammonia production capacity of 3,000-5,000 tons per year, which is about one hundred times smaller than that of imported fertilizer plants. Energy consumption averages 10 million calories per ton of ammonia in the large, imported plants, 18 mil- lion calories per ton in the medium plants (which are generally Chinese-built, using coal), and 24 million calories per ton in the small plants. The usual final product of the small plants, ammonium bicarbonate, is unstable, and in its usual, powdered form it begins to decompose when exposed to moisture or temperatures above 200C. As a result, there are serious difficulties in storing or transporting the fertilizer; and it cannot be applied on the soil surface but must be buried deep in the soil, which requires complicated application procedures./l Investment costs per unit of nutrient output were, at least until recently, at least as high - and (despite a low price of coal) /1 Equally serious problems occur when the final product is aqueous ammonia. In consequence the average effectiveness of both fertilizers, per ton of ammonia, is much lower than that from large plants. - 143 - variable costs under good management appear to be more than twice as high - in the small plants as in a recently imported urea plant./l Energy consumption and quality differences are also substantial and are similarly linked to plants of different sizes in the iron and steel industry, with the small plants often using 3-4 times as much energy per ton of output as the international standard, while the highest energy efficiency is attained in the largest plants such as Anshan; there the ratio is being reduced rapidly, though it was recently still about 1.3 times the average in Japan. 2.35 The phenomenon of very small plants competing with larger ones for scarce resources is found in a surprising range of industries. In some, as in iron and steel, the very small plants account for only a small and dwindling share of total output, while in others (such as paper) they remain extremely important. The phenomenon is prominent in other types of industries as well. Thus, for example, of about 640 factories producing ball and roller bearings, 49 principal enterprises produce 62% of the national output, while most of the others are very small. The cost of making similar sets of bearings is up to three times higher in a small plant than in a specialized large plant. 2.36 In the motor vehicles industry, the output of six principal auto- motive factories (Table 2.4) was supplemented by the output of many smaller plants in 1979. At one time more than 20 provinces were reported to have their own truck factories, and most probably still do. In the city of Table 2.4: MOTOR VEHICLE PRODUCTION IN THE MOST IMPORTANT PLANTS, 1979 Changchun No. 1 ("Liberator" 4-ton truck) 63,002 Beijing (Jeep and 2 ton truck) 24,170 Nanjing (2-1/2 ton truck) 15,021 .Hubei No. 2 ("Eastwind" 5-ton truck)/a 14,501 Shanghai (passenger car) 4,015 Jinan (8 ton truck) 3,515 Total 124,224 Other plants (most very small) 61,462 Total production 185,686 /a Located at Yongyang in a mountainous region 500 km north- west of Wuhan, this Chinese-built plant was initially intended to make 100,000 trucks per year, but has encountered many difficulties. /1 These cost comparisons are based on findings in an unpublished study by Christine Pui Wah Wong, "Rural Industrialization in the People's Republic of China," 1980. - 144 - Wuhan, the local motor vehicle industry employs 20,000 people. The principal enterprises (which included many branch plants) had a combined assembly capacity of 7-8,000 trucks, including at least three principal types and numerous other models made in small numbers - and there were also several dozen enterprises supplying parts./1 Regional Patterns of Industrial Development 2.37 When the People's Republic was established, China's industries were heavily concentrated in the coastal provinces. Since then, a major effort has been made to build up industries throughout the country and especially in the interior. Table 2.5 shows the recent geographical pattern of gross industrial output compared to population. Industry is still disproportionately concen- trated near the older industrial centers, but it is also significantly devel- oped in relatively backward parts of China. The leading industrial region (at least in terms of gross output) is East China - particularly Shanghai and the adjacent provinces of Jiangsu and Zhejiang, which together produced roughly one quarter of the national total. Shanghai has achieved remarkably success- ful industrial growth since the early 1950s, relative to the investments put into it, and has built up sophisticated and versatile engineering industries. At the same time, it is China's leading source of high quality light indus- trial products. A second leading industrial region is the Northeast, which is still the leading base of heavy industry and has a share of industrial capacity considerably bigger than its one sixth share of gross output. The third major industrial region is North China, particularly Beijing, Tianjin, and adjacent Hebei Province. In some ways, nearby Shandong and Hunan Provinces are part of this zone, in and around the North China Plain./2 This third zone along with Shandong Province links the other two, so that one could almost say that there is an industrial corridor, roughly from the city of Harbin in the Northeast down to a little south of Shanghai, containing about 60% of China's industries. Other concentrations of industry are found in central China (particularly Hubei and Hunan), Sichuan in the southwest, and Guangdong on the southeastern coast. 2.38 Each of China's 29 principal geographical divisions appears to have increased its gross output at least 12-fold from 1952 /3 to 1979, compared to a 17-fold growth nationwide. During this period, only five /1 However, jeeps assembled in Wuhan use several major components built in other provinces; and more generally, motor vehicle and engine plants appear to have a considerable degree of specialization and cooperation, which is now being encouraged. /2 In Table 2.6 Henan is listed in the Central-South region and Shandong in the East region, based on past administrative arrangements, but histori- cally and in their geography they have often been counted in North China. /3 Most of the percentage shares for 1952, presented in verbal briefings, varied from estimates published outside China. - 145 - Table 2.5: GEOGRAPHICAL PATTERN OF GROSS INDUSTRIAL OUTPUT, 1979 Approximate Percentage shares of industrial Industrial output per capita output Population (Yuan) Northeast Region Liaoning 9.1 3.5 1,213 Jilin 2.7 2.2 567 Heilongjiang 4.6 3.3 666 North Region Beijing 4.6 0.9 2,424 Tianjin 3.8 0.8 2,354 Hebei 4.4 5.2 396 Shanxi 2.3 2.5 432 Nei Monggol 1.2 1.9 297 East Region Shandong 6.5 7.4 413 Anhui 2.5 4.9 234 Shanghai 12.9 1.2 5,231 Jiangsu 8.4 6.1 654 Zhejiang 3.3 3.9 399 Jiangxi 1.7 3.3 242 Fujian 1.5 2.6 277 Central South Region Henan 3.7 7.4 236 Hubei 4.1 4.8 406 Hunan 3.4 5.4 299 Guangxi 1.6 3.6 269 Guangdong 4.6 5.8 372 Northwest Region Shaanxi 2.3 2.9 376 Gansu 1.8 2.0 436 Qinghai 0.3 0.4 370 Ningxia 0.3 0.4 378 Xinjiang 0.7 1.3 256 Southwest Region Sichuan 5.4 10.1 254 Guizhou 1.0 2.8 168 Yunnan 1.3 3.2 190 Xizang /a 0.2 /a Total 100.0 100.0 473 /a Less than 0.05%, so that the average output per capita is probably under Y 125. Source: State Economic Commission and SSB; per capita output estimate derived. - 146 - regional units (the coastal cities of Shanghai and Tianjin and the three provinces of the Northeast Region) experienced substantial declines in their shares of the nation's output. Numerical comparisons supplied unofficially suggest that these declines were all of rather similar proportions. Along the eastern coast is a long, contiguous belt (from Guangdong in the south up through Fujian, Jiangxi, Zhejiang, Anhui, Jiangsu, Shandong and Hebei) in which all the provinces roughly maintained their shares. Moving west toward the interior, there is a vast contiguous area (from Guangxi in the south up through Hunan, Hubei, Hunan and Shanxi north to Inner Mongolia, and westward to Shaanxi, Gansu, Ningxia and Qinghai) in which all the geographical units achieved large increases in their shares. Slightly east of this zone, the capital district of Beijing more than doubled its share of industrial output. Counting also the modest increases achieved in Sichuan and Guizhou, a very slight increase in Xinjiang, and the beginnings of industry in Xizang (Tibet), all of the interior and western China expanded its industrial output faster than the national average. If a year other than 1952 is used as the base year for comparison, the picture changes in detail; for example, Jiangsu (near Shanghai) expanded its share from about 6.3% in 1957 to 8.4% in 1979./1 /1 Additional information on the geographical location of industry emerged from briefings on particular topics. For example, in machine-building and metal products (including electronics, transport equipment, instru- ments and other engineering products), a breakdown by geographical areas based on one-time regional divisions was given in rough numbers for 1979 as follows: Number of Gross output Region enterprises (Y billion) Northeast 12,900 19.2 North 14,000 20.6 East 32,000 47.0 South-Central 22,000 18.9 Southwest 14,900 9.0 Northwest 6,800 6.8 In 1952 only 10% of China's cotton yarn came from "hinterland" regions but they supplied 37% in 1979; in paper the rise was from 25% to 40%. Out of Y 84 billion worth of output by enterprises within the general supervision of the Ministry of Light Industry, Shanghai led with Y 11.37 billion while seven other province-level units also had output over Y 4 billion: Guangdong (Y 7 billion ); Shandong (Y 6.3 bil- lion); Jiangsu (Y 5 billion); Sichuan (Y 4.3 billion); Zhejiang (Y 4 billion); and Tianjin (Y 4 billion). - 147 - 3. RECENT CHANGES IN POLICY A. Reassessment of Past Policies 3.01 Shifts in Chinese economic policy since 1979 have already profoundly affected industry. These shifts have been based on a revised assessment of China's situation and problems, and a return to tactical flexibility in pursuit of long-term goals. A higher priority is now being given than in the recent past to raising living standards as part of the quest for economic development. High priority is still given to industrial advances, but with the goal of achieving the modernization of industry (the second of the "four modernizations"/l), which implies a need to strengthen qualitative performance and technology. 3.02 Previous Chinese economic policies are now being criticized in retrospect as having placed excessive emphasis on heavy industry, accumulation and "production for production's sake," at the expense of attention to the needs being served. Particular excesses occurred from taking "steel as the key link" and overinvesting in the metallurgical industry, among others. Meanwhile, light industry was badly neglected, along with agriculture and "nonproductive" investments such as housing, education and cultural facilities. "Between 1966 and 1978, of the total amount of investment in capital construction, heavy industry took up more than 55%, agriculture, a little more than 10%, and light industry even less, only about 5%."/2 As further examples of the neglect of light industry, in 1976 only 2.1% of China's machinery output was built "by heavy industry for light industry;" and as of 1978, only 11.7% of the steel products made in China were used "for light industrial goods."/3 Production remained divorced from customers' needs, while numerous imbalances persisted. As a result, living standards were hurt, and the economy suffered from shortages of consumer goods, building materials, electricity, spare parts, and other items. Deliveries of goods and materials under the state plan were not dependable. Construction capacity was overextended, with too many projects started - particularly in heavy industry - so that investments took much too long to complete. Meanwhile, a significant fraction of the goods produced could not be used, but instead piled up in state warehouses. /1 The others are the modernization of agriculture, science and technology, and national defense. /2 Beijing Review, Dec. 21, 1979, p. 11. Heavy industry, it must be remembered, includes mining and electric power. /3 Ibid. - 148 - 3.03 A related criticism is that inadequate attention was given, particularly in 1966-78, to the efficient use of resources. Thus, inefficient enterprises, once established, were allowed to make losses and use excessive quantities of energy and materials per unit of output. Too much emphasis was placed on industrial self-sufficiency within each region and organizational unit. Both small and large plants were built to be "complete," based on a high degree of vertical integration, while opportunities were neglected for creating an efficient division of labor through specialization. Industrializ- ation programs put too much emphasis on immediate gains in production; investments in support of industry were neglected, notably in mining, transport, communications and power. B. New Policy Framework 3.04 The new policy framework first announced in early 1979 is designed to counteract and gradually overcome these problems, and to permit continued progress in face of an overall shortage of resources, including energy, foreign exchange and financial resources. As in an earlier period of readjustment (1961-65), the Chinese leaders have decided to reduce aggregate pressures on the economy by slowing the rate of growth, particularly in heavy industry, while sharply cutting back capital construction. At the same time, an effort has been launched to correct imbalances throughout the economy, relieving shortages and removing bottlenecks. The supply of consumer goods is to be increased; high priority has thus been given to light industry as well as agriculture at the expense of heavy industry. This approach reduces energy demand and helps to combat financial disequilibrium; it also frees resources for tackling deficiencies in the existing system and for finding ways of meeting technological challenges. In tackling deficiencies, a central objective - again reminiscent of similar efforts in the early 1960s - is to adjust what is produced to the needs of consumers and the economy as a whole. Pressure is being put on manufacturers to study the needs of their customers and, in some cases, to sell to them directly rather than turning output over automatically to higher authorities; exports have also been given high priority. A related policy theme is to get more and better output out of existing enterprises, and more generally, to promote efficient use of resources. To the extent required, efficiency is to be fostered by changes in organization and by restructuring inefficient industries. 3.05 A period of "readjustment, restructuring, consolidation and improvement" was inaugurated in 1979 to implement these policies. Initially this program was to last three years (1979-81). Because of the depth and difficulty of the problems encountered, the program has now been extended at least through 1983. 3.06 Within industry, light industries and a few bottleneck sectors have been given much higher priority and are receiving favored treatment in the allocation of scarce inputs, while rapidly expanding their output. Other industries are being set qualitative tasks. These include adjusting output to - 149 - customer needs, advancing technological capabilities, and, in some cases, beginning to restructure while creating a wider division of labor, including networks of parts suppliers. Throughout industry, steps are being taken to economize on the use of fuels and energy, raw materials, and working capital. Reforms have included experiments to give enterprises somewhat greater autonomy, but also new types of contracts, some competition among enterprises serving the same markets, and the beginnings of commerce in means of production. C. Implementation of the New Policies 3.07 The effects of the revised priorities are evident from China's recent trends in industrial output. Up to late 1978, gross output expanded rapidly, as vast new investments came on stream and production recovered from earlier political disruptions. Output increased by about 15% in 1976, by about 14% in 1977, and by 13.5% in 1978. Under the new policies, however, industrial growth has slowed down to 8.5% in 1979 and 8.7% in 1980 - still well above the planned rate of 6% for 1980. 3.08 A more dramatic effect has come in the relative contributions of light and heavy industry. Previously, heavy industry, grew faster than light industry; for example, in 1978, heavy industry increased its output by 15.6% and light industry by 10.8%. In early 1979, after the policy change, heavy industry continued to outpace light industry, but after the middle of the year, this situation was reversed. The final results for 1979 showed an increase of 9.6% in light industry compared to 7.7% in heavy industry. In 1980 the difference was spectacular. Light industry increased its output by 18.4% while heavy industry grew by only 1.4%. As a result, the share of light industry in gross output rose from 43.1% in 1979 to 46.9% in 1980. Thus, under the new policies, the growth of heavy industry decelerated in two years from 15.8% to 1.4%, while that of light industry surged forward. In the first quarter of 1981, output of light industry rose by an estimated 9.9% compared to the same 1980 period, while output of heavy industry dropped, leaving a 1% overall growth. As a result, the proportion of light industry in gross indus- trial output rose to 50.2%./1 3.09 In 1979 and again in 1980, spectacular increases have been achieved in the output of consumer engineering products. In 1979, the number of tele- vision sets produced rose 157%, while the number of cameras rose 33%, wrist watches 21%, and bicycles and radios 18% each (Table 1.4 above). In 1980, big gains were achieved again in production of radios (117%), television sets (87%), cameras (57%), sewing machines (31%), wrist watches (30%), and bicycles (29%), while some other items such as tape recorders and pocket calculators jumped forward even faster from a modest base. Textile output also jumped by about 20% in 1980, with gains in individual products ranging from 11% (cotton yarn) to 47% (synthetic fiber). /1 Xinhua news release of April 15, 1981. - 150 - 3.10 The surge in light industry output reflects aggressive implemen- tation of the shift in priorities. Allocation of electricity has been switched to favor enterprises producing consumer goods and exports, some of which are guaranteed electric power even in the event of widespread power failures. Priority has also been given to light industry in transport and in the supply of materials. Scarce raw materials in industries such as textiles are being systematically channeled to the more efficient enterprises, which can achieve a higher output from limited supplies. Cotton and other raw materials for light industry, and materials for packing or packaging exports, were imported in 1980 on a larger scale than ever before, while imports of steel products were cut back sharply. 3.11 By contrast, in many branches of heavy industry, the 1980 annual plans called for a sharp decrease in output. These planned cutbacks have not been equally distributed across enterprises; rather, orders, energy and materials are being channeled first to the best performing enterprises and have been cut back more than proportionately for the weaker ones. Many of the larger machinery enterprises appear to be operating at only a small fraction of their potential capacity; in some, workshops are receiving electric power in a sequence over the week. Thus in some industries at least, vast amounts of excess capacity, built in previous eras, remain largely idle for lack of sufficient orders, energy, or raw materials. 3.12 Output would have fallen absolutely in heavy industry in 1980, if it were not for capital equipment producers obtaining orders from buyers with needs not previously served rather than relying only on orders from their usual customers under the plan. Probably the largest efforts in this direction was made by enterprises under the First Ministry of Machine Building, which got 46% of their 1980 orders through their own efforts. In steel, output rose to over 37 million tons, instead of declining as planned to about 33 million tons, but output was reportedly up sharply in steel products in short supply and down in those in excess supply. Restructuring has also been carried forward vigorously in other industries. For example, in cotton textiles, a number of small and technically backward mills have been closed down. In tractors, an effort is being made to reduce the number of enterprises assembling final products, while converting many small factories into specialized parts suppliers. 3.13 Particularly striking successes have been achieved in raising industrial output in the face of energy shortages. The increase of 8.5% in industrial output in 1979 was achieved with only a 3.1% increase in national energy supplies, but with an improvement of 5.1% in energy utilization per yuan of gross output in industry. The 8.7% increase in output in 1980 was similarly achieved in the face of a 1.3% drop in national energy output, based on a 2.4% decline in coal, a 0.2% decrease in oil, a 1.7% fall in natural gas, and a 6.6% increase in electric power production. Thus, over the two years, industrial output rose by about 18% in a context of an increase of less than 2% in the national energy supply. Energy use throughout industry is now being closely monitored. Preliminary reports - 151 - claimed "savings" in industry in 1980 of about 10% in oil, 5% in coal, and 3% in electric power use, relative to output. More recent computations show "savings" equal to about 35 million standard tons of coal equivalent, or 7.2% of industrial energy use, of which 22 million standard tons came from shifts in the composition of output (from heavy to light industry) and the other 13 million tons (2.7% of energy use) through improved management of industrial output or savings within industries. 3.14 Progress has also been achieved in expanding manufactured exports. The US dollar value of China's exports of manufactures and nonferrous metals increased in 1979 by over 40% as compared with 20% p.a. in the two previous years (Table 3.1). World inflation in the US dollar price of manufactured exports averaged 14-15% p.a. in these years, so that real growth has accelerated sharply. This success is believed to have continued in 1980, when the dollar value of total merchandise exports rose by 28%./1 3.15 The bulk of China's manufactured exports consist of textiles and other light industry products (Table 3.1). Only a small share is capital goods. A more detailed picture of China's manufactured exports can be gained from reports from importing countries. In 1978 only about one third of total exports were sold in industrialized economies. Over half were sold to developing market economies including Hong Kong and Macao; and probably no more than 15% went to centrally planned economies in Europe or Asia. Developing countries were the predominant market for most product groups and took an especially large share of China's exports of machinery, equipment, and other metal products. China's import penetration in industrialized countries is still small. China in 1978 supplied only 4.6% of OECD member countries' combined imports of manufactured goods from developing areas of East Asia; the share was 16.3% in textiles and 3.2% in clothing. OECD manufactured imports from China were less than one fifth of those from either Hong Kong or the Republic of Korea. They were also smaller than those from Mexico, India, Singapore, or Brazil. 3.16 Numerous new measures have been introduced since late 1978, to promote trade and to attract foreign capital to assist in China's industrial development. New trade corporations and other special organizations (such as the China International Trust and Investment Corporation) have been created; existing foreign trade corporations have established branch offices with expanded powers; and the power to enter into foreign trade arrangements has been partly decentralized. Several new types of arrangements have been introduced, including processing of foreign supplied materials or assembly of foreign supplied components; compensation trade in which foreigners supply equipment and assistance in exchange for part of the output; joint ventures; and cooperative production in Chinese-owned facilities. Special export processing zones are being set up on the southeast coast near Hong Kong. /1 For further details on trade trends see Annex G, "External Trade and Finance." - 152 - Table 3.1: MANUFACTURED EXPORT TRENDS, 1976-79 (million current US dollars) Growth rate (% p.a.) 1976- 1978/ 1976 1977 1978 1979 78 79 Manufactures & Nonferrous Metals (SITC 5-8) 3,111 335 4,510 6043 20.4 40.6 Heavy & Chemical Industry Products 808 851 1,010 1,497 11.8 48.2 Chemicals & related 198 184 234 424 8.7 81.2 Machinery & transport equipment 238 296 332 464 18.1 39.8 Metals & other products 372 371 444 609 9.2 37.2 Light & textile industry products 2,303 2,674 3,519 4,846 23.6 37.7 Included in Another Classification /a Textiles 1,481 1,573 2,190 2,940 21.6 33.3 Handicrafts 460 599 720 941 25.1 30.7 Other light industry 527 601 736 968 18.2 31.5 Machinery 182 216 261 (340)/b 19.8 30.3 Total Merchandise Exports 6,855 7,590 9 74 13,658 19.2 40.2 Of which: Fuels 924 1,068 1,345 2,654 20.6 97.3 /a Relationships between this and the previous classification are not fully understood. /b Including a new category of technology and related equipment. Source: Ministry of Foreign Trade. - 153 - Thus far, these new arrangements only account for a small fraction of China-s manufactured exports, and it is still the exception that foreign buyers supply designs or have direct contacts with Chinese manufacturers./1 By international comparative standards, Chinese trade arrangements are still bureaucratic. However, these shifts represent an important start. Revised internal pricing of foreign trade transactions at an exchange rate (Y 2.8 per dollar) more favorable to exports and import substitution has been another valuable measure to stimulate manufactured exports; and other direct signals and measures within China have apparently been vigorous. 3.17 The readjustment program has been considered to be less satisfactory in cutting back industrial construction than in switching current output. However, in the economy as a whole, huge cutbacks have been made in programs of capital construction, except in energy and power, transport, communica- tions, and building materials, where serious bottlenecks require fast completion of crucial projects. Fully 295 large and medium-sized construction projects were suspended or deferred in 1979, and over 200 more in 1980, compared to 82 completed in 1980 and 904 still under construction at the year's end. Large cutbacks were also made in provincial construction programs. Cutbacks in 1979 (Table 3.2) centered in metallurgy and industrial equipment, while the largest increase came in cement. Not much net rise seems to have occurred in investment in light industry; indeed, construction in some categories (such as chemical fibers) was reduced; so that the swift output increases of 1979-80 seem to have been based mainly on previously unused capacity. 3.18 In 1980, the effort to cut back construction in the aggregate has been thwarted not only by slowness to implement the program to the extent called for, but also by increases in decentralized, uncoordinated investment. This has included much investment in new industrial capacity by lower levels of government, which were given increased autonomy in their use of resources, and by rural communes and brigades, which as a result of higher procurement prices now have higher cash incomes. Capital construction covered by the national budget fell by 24.9% in 1980 compared to 1979, while other state capital construction roughly doubled, so that the overall total rose by 7.8%. /1 From July 1978 to the end of June 1980, China received a total of $60 million of export processing or assembly fees; this total is expected to rise to $100 million by the end of 1980, based on a cumulative total of over 6,300 processing or assembly contracts, of which 70% were with Hong Kong and Macao, 20% with Japan, and 10% with other countries. About 330 compensation agreements were entered into from mid-1978 to mid-1980, mostly with Hong Kong and Japanese partners. Up to the end of 1980, 17 joint ventures had been entered into, most of them in tourism and light or handicraft industries, along with a handful of cooperative ventures, of which the largest was a $50 million contract for manufacturing toys. According to China Business Review, March-April 1979, pp. 72-73 and November-December 1979, p. 21, preliminary agreements have been signed with McDonnell Douglas for joint production of DC-9 Super 80 jets and with Bell Helicopter Textron for production of helicopters. Annex G provides further information on these and other changes in trade policy. - 154 - Table 3.2: TRENDS IN INVESTMENT IN CAPITAL CONSTRUCTION BY INDUSTRY, 1977-79 /a Value in million current yuan Percent share 1977 1978 1979 1977 1978 1979 Food, beverages & tobacco 364 512 512 1.7 1.9 2.0 Textiles 1,496 1,338 1,412 6.9 4.9 5.5 Chemical fibers 1,190 904 760 5.5 3.3 3.0 Wood products & furniture 39 49 58 0.2 0.2 0.2 Paper & pulp 147 207 280 0.7 0.7 1.1 Chemicals, rubber & plastic products 2,905 3,134 2,946 13.3 11.4 11.5 Basic chemicals 668 1,196 1,318 3.1 4.4 5.1 Fertilizers & insecticides 1,907 1,500 1,234 8.8 5.5 4.8 Pharmaceuticals, fats, soap, etc. 131 173 150 0.6 0.6 0.6 Petroleum industry except extraction 588 813 622 2.7 3.0 2.4 Coal washing & dressing 11 13 67 0.1 0.1 0.3 Nonmetallic mineral building materials 669 916 1,244 3.1 3.3 4.8 Cement & cement products 297 422 728 1.4 1.5 2.8 Glass 42 41 44 0.2 0.2 0.2 Other 76 126 91 0.4 0.5 0.4 Basic metallurgy & metal mining 4,273 4,648 3,472 19.6 17.0 13.5 Machinery, equipment & metal products 3,252 4,081 3,624 15.0 14.9 14.1 Agricultural equipment 534 651 445 2.5 2.4 1.7 Industrial machinery & equipment 940 1,388 789 4.3 5.1 3.1 Transportation or "communication" equipment 572 558 443 2.6 2.0 1.7 Machinery for nonproductive use 162 210 157 0.7 0.8 0.6 Other manufacturing 538 660 709 2.5 2.4 2.8 Coal mining 2,247 3,167 3,119 10.3 11.6 12.1 Petroleum & natural gas extraction 1,488 2,347 2,085 6.8 8.6 8.1 Logging & transport of timber 247 388 436 1.1 1.4 1.7 Electric power 3,472 5,091 5,099 16.0 18.6 19.9 Total 21,736 27,316 25,685 100.0 100.0 100.0 /a Includes investment in the state budget and by various localities, enter- prises and industrial departments. Does not include renewal and replacement of fixed assets and investment put up by collectively owned organizations. Source: Data supplied to UN Statistical Office. - 155 - (Investments made by industrial enterprises appear to have been more acceptable as they were largely restricted to plant improvements and new housing). In late 1980, the central authorities reasserted central control over investments at lower levels and sharply criticized "blind and duplicate" local investment in industry. Strict rules were imposed to forbid new investments in some industries (for example, cotton textiles), while requiring central approval of investments in others. 3.19 Sentiment against this surge of decentralized investment focused not only on its effects in construction, but even more on its effects on the supply of raw materials for light industry. Too much processing capacity has been created by uncoordinated investments. Perhaps the worst effect has been a swift expansion of inefficient light industry in poor and backward regions, using local raw materials formerly shipped to distant industrial centers. This has contributed to a shortage of raw materials such as hides and leather, fibers and tobacco, in China's leading industrial centers. The new local industries achieve much less quantity and quality of output per unit of raw materials. 3.20 These developments seem to have sprung from increasing decentralized units' power to invest without changing the signal system of prices, taxes, and scarcity rationing. A drive to expand industries in each locality, wherever local resources and prerogatives permit, reflects high projected financial returns based on this tax and price structure, which make industries seem very profitable sources of local revenue. Other parts of the explanation are also a pent-up desire to improve local incomes and living standards, and the difficulty of getting goods in short supply. These considerations make such investments appear enormously attractive locally, even when (as is very often the case) they make no sense from a national point of view, since the industry as a whole may already have redundant capacity and be starved for either orders or raw materials. 3.21 Officials now appear to be concerned that the expansion of both urban and rural collective enterprises has been proceeding too rapidly. Statistics now available show an increase in the number of enterprises at the commune level and above from 322,723 in 1977 to 355,013 in 1979 (a rise of about 10% in two years), with most of the increase coming in machinery or metal products, food, and building materials enterprises./l The number of collective enterprises reportedly jumped sharply also in 1980. At the same time, employment estimates with and without state enterprises (Table 1.3 above including the footnote) indicate that the number of workers in urban collective and rural commune enterprises must have increased by /1 See Annex B, Table 7.2. - 156 - about 4.5 million from 1977 to 1979. Along with diversion and shortages of raw materials, the apparent deceleration in the growth of light industry in the last months of 1980 and the first quarter of 1981 may have reflected, in some cases, capacity constraints. However, any major cutback in China's rural small-scale processing industries, or measures to keep them from expanding further, could have adverse effects on rural incomes and employ- sent, so that there are clear tensions between policy objectives in this area. 3.22 In the state sector, and particularly in heavy industry, each enterprise and region has tried to adjust its program in light of the new priorities, campaigns, and injunctions from the center. Among the most interesting programs are those in machine building. The Minister of the First Ministry of Machine Building has written that, in the machine-building industries, six changes are now being pursued: "The first is the change from principally serving heavy industry to serving many other needs as well, like those of agriculture, light industry, municipal construction and the people's livelihood. The second is the change from principally serving the construction of new factories to serving old factories as well in tapping their potentials, innovations and transformation. The third is the change from merely carrying out manufacturing to undertaking the responsibilities of designing complete sets of equipment and planning complete processes for production, installation, adjusting and testing, repair and maintenance, supplying fittings, personnel training and so on. The fourth is the change from aiming at the domestic market to fighting our way into the international market. The fifth is the change from producing small batches to producing large ones and gradually achieving specialization in production. The sixth is the change from principally grasping output value and output quantity to principally grasping quality, variety, punctuality in delivery, the lowering of costs and the continual raising of our enterprise management standard. The core of the six changes is the raising of the ability of the machine-building industry to satisfy various social needs so that the production is really carried out for the sake of satisfying the needs of various sectors of society" ./1 /1 Zhou Zijian, "Structural Reform and Direction of Development of the Machine Building Industry," Red Flag, No. 11, June 1, 1980, as trans- lated by the British Broadcasting Corporation in BBC SWB FE/6453, June 24, 1980. Briefings on machine-building elaborated much the same points, stressing also efforts to supply more equipment to collectively owned enterprises. Makers of industrial and military equipment have switched part of their output and now make consumer products as well as equipment for sectors not previously served. - 157 - 3.23 These efforts to reorient machinery output have required managerial and institutional reforms. Machinery production is being based on orders and contracts; some equipment is being sold, and even advertised, for the first time; and enterprises are being allowed to sell their output directly once their targets are met. Efforts are being made to strengthen enterprises' "sense of operation, of market, of competition and of service." 3.24 Within industries, efforts are also being made to carry out reorga- nization based on principles of rationalization, efficiency, cooperation, and specialization. Thus, for example, in the system under the First Ministry of Machine Building, hundreds of specialized corporations and associations have been established based on more than 10 forms of association or integration. Further programs and proposals for reorganization and management reforms are being considered and exhaustively discussed. In machine building, these now include efforts to reorganize across the lines set by industrial activities, regulations, ownership, military vs. civilian spheres, etc. Thought is also being given to creating information centers relating to international and domestic markets, as part of an effort to strengthen indicative planning and forecasting. 3.25 An enormous effort continues to be devoted to technological transformation, mastering new products, and raising the technical level of industry. In machine building, this effort now seeks to shift the emphasis from quantity to quality. Energy conservation and lower costs of production are central themes. Energy-inefficient products are being phased out. Much emphasis is being placed on improving testing equipment, quality control, and technical and scientific research work. Efforts are being redoubled to master advanced design technology. Stress is being placed on improvement of basic components and products. Key plants are being re-equipped and renovated to improve their precision and efficiency. Tasks and schedules have been specified for mastering particular new technologies and for producing new major items of equipment, sometimes with foreign contractual assistance. 3.26 One concern inevitably raised by China's recent policy shifts in industry is the need to reconcile potential conflicts between elements of the new policies. Perhaps the biggest conflicts can be seen in budget alloca- tions. The expansion of light industry has been achieved at some cost; "in 1980, the state granted a loan of Y 2,000 million for the light, textile and electronic industries while the local authorities appropriated a sizeable amount of funds."/1 All the other new policy concerns also tend to require either additional funds or project cutbacks. While drawing up programs in line with these policies, managing officials at every level have also identified needed investments or have proposed projects that have yet to be approved. Thus, even where there is a common thread in programs at all levels, such as energy conservation, it is often woven into proposals for new investment. /1 Beijing Review, January 26, 1981, p. 7. - 158 - 4. STRENGTHS, WEAKNESSES AND PROBLEMS A. The Chinese Authorities Appraisal 4.01 Chinese officials' appraisals and published statements on their manufacturing industries are paradoxical. On the one hand, high technology areas of industry have recorded many admirable engineering and technical accomplishments, making, for example, gigantic precision machines and very difficult instruments. Production of a wide range of difficult products has been mastered. Output has grown rapidly. But on the other hand, the reports point to many significant problems and weaknesses. 4.02 To some extent these negative evaluations reflect high aspirations and an almost exclusive focus on comparisons with advanced industrialized countries. For example, most of China-s light industries are described as very backward by international standards. Their capacity is still tiny compared to what is needed; their equipment is mainly obsolete; their Chinese-made equipment is of poor quality; imported equipment is needed for many tasks; plants are too small; many cause serious pollution; and particularly outside Shanghai and Tianjin, technical capabilities are very weak, the level of managerial competence is very low, and product designs and quality are generally poor and uninspiring. Moreover, most of these industries are weak, struggling with serious raw material problems caused not only by insufficient supplies (which are difficult to correct), but also by the poor quality and unsatisfactory processing of natural materials (leather, wool, etc.) and by past neglect of light industry needs (so that dyes, strip steel, etc., are of poor quality and many items must be imported). Evalua- tions of these aspects of industrial performance would be more favorable if other developing countries were the point of reference. 4.03 Based on Chinese authorities' statements, some important weaknesses in industry as a whole, and especially in heavy industries, are listed below. (a) Though there is some very good equipment, the proportions are much inferior to those in advanced countries; thus, a much smaller fraction of the machine tools are special purpose or high pre- cision types, and the share in China has hardly been increasing. (b) Product design is a weak area. Equipment produced tends to be 20 to 30 years out of date, based on past borrowings and only slow increases in China's own design capabilities. By current international standards, a large share of the equipment now made is inefficient in use of energy and performs poorly. Many machines are small, slow, or have poor control systems. Often they do not achieve the same standards of accuracy or productivity as their foreign prototypes. - 159 - (c) The design problem is aggravated by low levels of technical know- how in moving from new product designs to series or mass pro- duction. This reflects both inexperience in designing assembly lines and difficulties in designing and building the specialized machinery required. Adding to these problems, the quality of equipment suffers because of an inability to make particular components well and the inferior quality of alloy metals or other materials, which reduce product life and performance. As a result, China can make only small quantities of equipment based on its best designs. Many machinery plants can only produce equipment of types no longer required or wanted. The average quality of equipment has tended to fall further below that in advanced countries as foreign industries have moved forward to new generations of technology. (d) For these and other reasons, even though China tries to make most of its own equipment, there are many desirable equipment items that it cannot yet supply for itself. Efforts to become energy efficient or raise the level of technology and performance increase the need for imports. Adding to this need, large numbers of par- ticular materials cannot yet be supplied in adequate quantities. In the metallurgy industry, for example, difficulties have come in manufacturing (for example, in silicon steel, stainless steel, tinplate, or thin sheet steels) while other difficulties relate more to mining and initial mineral processing (for example, of copper, aluminum and other nonferrous metals). (e) These shortages in turn are part of a general problem of imbalances in industrial capacity, as industries have not developed sufficiently along lines of serving and meshing with user needs. (f) Management quality and methods are deficient and technical levels are weak in most plants and industries, with various negative consequences, e.g. mistakes are made, and the potential of existing enterprises is not fully realized. More technical personnel (with higher education) are needed. There is also a need to foster innovation. (g) Wasteful errors have been made in the planning and design of even the largest industrial projects, with construction often begun before finishing engineering studies or analysis of the suit- ability of the project design. As a result, expensive plants in industries such as steel, chemical fertilizer, oil refining, and petrochemicals (including some foreign-built plants) have had to stand idle for lack of raw materials, energy, or other basic requirements; vast sums were spent to build a cross-country pipe- line to transport natural gas, which could not, in fact, be produced; and poor choices have been made in project sites. - 160 - (h) In most branches of industry there is usually one segment of the industry that presents special problems compared to the better plants (for example, very small plants where the quality of output is poor and materials consumption high). B. Mission Findings 4.04 Plant visits and discussions at different levels generally con- firmed or proved consistent with the information about the problems and achievements of China's industries given in briefings by central ministries and commissions, as well as in recent writing by high officials. Neverthe- less, the available information is usually insufficient to allow an accurate assessment of the absolute dimensions of these problems, the absolute standards being applied, or (much harder still) the standards that should apply in China. 4.05 Many of the difficulties in evaluating the performance of China's industrial sector relate to the country's level of development, others to the country's economic system. Alleged inefficiencies in the system are closely associated with efforts to promote growth and technological advances, and thus some of them may be prices to be paid for the system's strengths. But faster advances might well be possible, if resources could be used more appropriately. The economic efficiency of investment choices and the techniques used ought to be judged by their contribution to the achievement of national objectives, taking into account the resources available and the opportunities offered by international trade. China's resource situation has some unusual features, especially considering the resources inherited from the recent past; and such a large economy faces inevitable difficulties in obtaining, through trade, more than a small fraction of the equipment or other industrial inputs it requires for rapid growth. China can drive up the prices of many of the goods it wishes to import, or drive down the prices of many of its exports. This situation makes it difficult to judge whether courses of action are economically efficient, or what alternative technologies or decisions would be more appropriate. This is especially true since prices in China do not reflect scarcity value (or shadow prices) of particular goods or factors of production. The high scarcity value of some factors (e.g. foreign exchange or highly skilled engineering talent), and the very low scarcity value of some others (e.g. unskilled labor that does not consume urban housing and services) can be inferred; and judgments can be made on the most obvious mistakes. But in many instances, information is insufficient to judge whether a course of action makes economic sense or not. This is true not only when techniques or equipment are backward or uniquely Chinese, but also when they are advanced. - 161 - Efficiency in Production 4.06 With few exceptions, the plants visited showed many signs of inefficient use of capital. Machinery is abundant: most plants are opulently equipped for their tasks. In many plants, a high proportion of the machinery appears to stand idle most of the time. Some is production machinery used only occasionally, or back-up capacity; some is idle because the plants have unbalanced capacities; and usually some is idle for other reasons, such as lack of orders and energy. However, machinery is invariably well maintained. 4.07 A large share of the machines and instruments, including many fine pieces of equipment, are Chinese made. Indeed, almost all plants and all research institutes visited have built a significant proportion of their equipment for themselves. Maintenance and repair shops are outstandingly well equipped, partly to avoid problems of securing spare parts, which are rarely available. A textile factory, for example, had a foundry and a forge for making spare parts, and extensive, well-equipped machine shops that could repair even their own maintenance machines. The instrument maintenance workshop at a petrochemical plant had a forge, a die-casting unit, an electroplating unit and a heat treating department, along with extensive calibration and repair facilities. 4.08 Enterprises also typically contain huge amounts of working capital in the form of work in progress. Often this takes up valuable floor space or is kept outside, exposed to the elements. 4.09 Buildings seem to receive less attention than the equipment in them. While machinery is maintained with exemplary care, buildings are nearly always poorly maintained and are often rather dark, with broken windows; the machinery is nearly always cleaner than the corridors. Buildings designed and constructed for a particular industrial purpose were not as well designed as those built at the same time in other countries. Some factory layouts cause difficulties; and serious problems are encountered in providing dust-free environments, e.g. for making power transmission equipment. The design of buildings now under construction seems to be much improved. Another common problem is that factories have been located in the middle of workers' housing, or in residential areas, aggravating environmental pollution problems. Safety is pursued by providing protective helmets and goggles, and by wall posters and instructions stressing the priority of accident avoidance, but press tool guarding is nonexistent and welding operations are generally unscreened. 4.10 A large share of China's most technologically skilled enterprises are said to be in crowded and unsatisfactory older buildings. At many of the units visited, buildings were originally designed and built for another purpose (e.g. living quarters). Though this practice may be the source of initial economies, it leads to added costs and operating problems later. Thus, it is difficult to maintain clean, dust-free conditions in an integrated circuit plant that was formerly a school; and the layout of an engineering institute leads to compromises if it is used as a vehicle plant. - 162 - The difficulties of operating enterprises in "second-hand" buildings are increased when the enterprise expands. Reluctance to build encourages overcrowding of equipment; the work flow is handicapped; supervision is difficult; and damage to the product is more likely. 4.11 Labor seems to be assigned in very large numbers, even taking into account the needs of training and materials handling; and this is especially true in plants that now stand partly idle. As a result, particularly in heavy industry, large numbers of workers appear to have little to do. It seems possible that a large part of the work is executed by a small proportion of the work force employed. The potential of some highly trained people is not fully used. The present low level of worker utilization may be temporary but could have long-term effects if a leisurely paced, part-time pattern of working becomes accepted (work habits acquired in youth will be hard to change later). 4.12 At some plants, allocations of products and materials according to the annual plan may be inefficient and make little economic sense./1 4.13 Inefficiency could also be traced to a dependence on supplies from a different ministry or organizational unit that evidently placed its own objectives ahead of those of its outside customers, or to some other failure in coordination, or conflict in objectives, among separate units. These problems are never readily admitted - Chinese units at all levels invariably criticize only themselves. 4.14 Striking contrasts were found in the apparent efficiency and technical strength of several branches of industry. Indeed, the arrangements connecting the different sectors of the economy, which are very different /I Thus, to augment its own insufficient mining capacity, the Wuhan Iron and Steel Works was importing about 1.5 million tons per year of Australian iron ore (which had to be reloaded from ships into barges in Shanghai, then into trains at a river port). This augmented the mill's pig iron output, but for lack of the necessary steelmaking facilities, 700,000 tons of pig iron were being sold (and had to be reheated somewhere else) in face of a national surplus of pig iron. The rest of the Australian ore served, at the margin, to supply steel to the plant's older rolling mills, probably making steel products of types in surplus supply, and indirectly helped to allow locally mined ore to be used to operate three inefficient smaller steel mills belonging to the province. Meanwhile, the new hot and cold rolling mills at Wuhan, China's finest steelmaking facility with a unique capacity to make steel of types in short supply, were operating at only a small fraction of capacity, by some accounts partly for lack of electric power to run them at higher levels; but little thought seemed to be given to switching power from less important uses (such as making pig iron). - 163 - from those in a market economy, lead to more compartmentalization and weaker coordinating forces to assure equitable access to resources in different branches and levels of the system. This means, for example, that new equipment and more efficient methods do not drive out older vintages in the same way; and technological improvements or management standards do not spread among industries and organizations by the same mechanisms. However, within each branch of industry (defined by final products and a common reporting ministry), much attention is paid to spreading better practices through visits and technical assistance arrangements among enterprises or regions. 4.15 Within light industry, the strongest branch is clearly textiles, while most other branches have serious shortcomings. A cotton spinning and weaving plant visited by the mission appeared extremely efficient and meticulous by international standards, attaining very high machine efficiencies and an extremely high proportion of first quality fabric. The textile finishing plants, though regarded (no doubt correctly) as the weak link in the industry, were nevertheless well managed and technically good. By contrast, the garment factories, though export successes and probably outstanding by Chinese standards, were backward and had low rates of machine utilization by international standards. A paper plant visited exemplified important deficiencies of the whole paper production industry, i.e. the small scale of equipment and difficulty in obtaining raw materials (most Chinese output is based on reeds, straw, bamboo or bagasse). 4.16 In heavy industry, marked differences in strength (by world standards) are apparent, even in different branches of the same Ministry. Thus, for example, the machine tool industry appears stronger, by international standards, than the motor vehicle and internal combustion engine industry, if only because mass production is not expected to the same extent. A big petrochemical complex based mainly on Chinese engineering appeared admirably up to date, with very satisfactory operation and mainte- nance. Product Designs, Production Technology and Labor Skills 4.17 The quality of Chinese-made machinery and equipment appears to vary widely, by international standards, from excellent to extremely poor. Chinese workers have produced a wide variety of good equipment, embodying many of the latest principles. This includes some big items such as blast furnaces; but most of their successes involve items made in very small numbers. Industry seems able to supply a wide range of instruments needed at the laboratory level or to control operations in processing industries. Many machine tools appear to be of high technical quality. But a majority of designs are obsolete and inferior to some degree, compared to those in advanced countries, and the designs of many items of equipment made in - 164 - large series are way out of date, for example, the noisy and slow industrial sewing machines, or the textile machines with cast iron gears. 4.18 There is a wide range in the quality of machinery in various industries. Laboratory equipment and general purpose machine tools are more competitive in design and quality than textile machinery and paper machinery. In textiles, the lack of advanced equipment appears to be most acute in the dyeing and finishing sections and in the spinning of synthetics. In heavy industries, there have been problems in scaling up equipment, in producing large, complex systems, and in introducing numerical controls and other new developments. Another major problem in modernizing equipment has been the need to improve specialist components or assembly parts (e.g. automobile electrical equipment, diesel injection equipment, vehicle brakes systems, industrial hydraulic and pneumatic systems, small motors, or power trans- mission chains). Items such as these are supplied by Chinese sources. They are well finished and generally sturdy, but frequently they have technical designs of 1950 or earlier. 4.19 Most product designs in consumer goods industries leave much to be desired, notably in visual appeal but often also in performance quality. 4.20 While many production technologies in use are outdated, they frequently appear to be appropriate for existing conditions. Some plants visited have tried to raise the level of their manufacturing technologies by their own efforts and have made significant advances. But despite a strong grasp of the scientific principles, others have not been entirely successful because of the difficult operating requirements of the improved techniques. 4.21 With few exceptions, Chinese plants do not possess large, specialized production lines, which would lock them into outdated designs. Rather, much manufacturing of series products is by methods more suitable to the manufacture of prototypes, i.e. it is based mainly on the skill of the operative, who uses general purpose machine tools. Often newer designs are being made in small numbers in the most advanced plants or institutes. Assembly line or other mass production techniques observed were not usually very advanced. 4.22 Given the products being made and the methods used, Chinese enter- prises showed admirable attention to quality and much craftsmanship. Quality control is an active concern; often statistical quality control charts were displayed in workshops. Some enterprises had well equipped quality control testing facilities and others were trying to acquire testing equipment. 4.23 The most serious lags in both product design and manufacturing technologies are evident in industries in which, outside China, technology has moved forward especially fast in the last two decades, while the Chinese industry has had little help from abroad. A semiconductor (integrated circuit) plant visited, for example, was extremely backward and had very low ratios of circuits produced per silicon chip started, by today's standards. - 165 - Again, only small numbers of computers are produced and they are not standar- dized, which has hampered software development. Telephone and related telecommunications is another area in which Chinese equipment is outdated and where new technology would probably be far more efficient. 4.24 Clearly the overall supply of high quality professional and technical manpower is a serious problem, especially as a result of the hiatus in higher education from 1966-76. Some units visited have been unable to get new technical specialists in recent years, and others were retraining recent "worker, peasant and soldier" graduates, with mixed success. The available information on educational attainments of the industrial labor force, though fragmentary, suggests that ratios of well-educated personnel are low by Far Eastern as well as Western standards./1 4.25 Nevertheless, scientific skills and technical know-how are remarkable in many units. Based on experience elsewhere, most of the technological difficulties observed could be expected in a country at a fairly advanced intermediate level of development, though a few are due to China's past isolation. 4.26 The units appeared to be less hampered by a lack of skilled manual workers. Indeed, shop-floor skills were excellent in most plants. Specialized training arrangements for workers appear to have been generally successful. Machinists and other machine operatives were maintaining high standards of work. Machined finishes appeared first class. Handicraft workshops produced fine workmanship. Foundry workers produced high quality castings in foundries that were sound in essentials but not elaborately equipped. Forging operations, however, might have been improved, since material economy was poor. Furnace operations in steel mills were adequate but not outstanding. Pollution and Environmental Impact 4.27 Chinese industry has serious pollution problems; these are now being taken seriously after being disregarded (e.g. in locating plants) in the past. Probably the heaviest polluters are the large integrated steelworks. A considerable amount of work has evidently been done to develop possible solutions; the schemes proposed demonstrated a general awareness of the technologies available and of their potentials, which would include energy savings to offset some of the considerable costs./2 Other heavy /1 See Annex I, "Education," paras. 2.02, 2.03, 2.08 and 2.09 and Tables 2.1 and 2.5. /2 For example, at the Shoudu (Capital) Steelworks in Beijing an estimate was given of Y 375 million for introducing coke dry quenching, converter gas cleaning and recovery, and boiler and power generation expansion, combined with modification of an adjacent power station using recovered gas from the plant. - 166 - polluters are the pulp and paper industries, which pose special problems, since the volume and type of pulp effluents depend on the pulping process and thus the cellulosic materials used. Chemical recovery systems are available internationally for the larger wood-based pulp operations, but it will be difficult to develop economically attractive systems for pulping the reeds and straw used in China. The relocation of plants now in cities may be required. Other industries are also working to reduce pollution. The Beijing and Shanghai municipal authorities have developed pollution control programs and are exerting pressure on industry to comply. Increased vigilance is also needed in investment projects, since experience in other countries has shown that pollution problems can be more cheaply avoided by the initial siting and design of plants, than by retroactively adjusting plants already built. Management and Decision Making 4.28 It is frequently asserted in China that industrial managers are not sufficiently well trained, so that management methods are backward. Managers in industry at all levels appear dedicated, energetic and remarkably able, in pursuing their assigned tasks. Both in research and production many Chinese managers appeared perceptive about their technical problems and had well-based ideas on how to deal with them, with the help of resources from higher levels. Major deficiencies are apparently experienced, however, in the methods and procedures by which decisions (particularly on investment projects, but also on the allocation of scarce resources) are reached and in the information used in making them. As a result, mistakes and inefficient choices seem to be frequently made. For example, the design of investment projects in manufacturing appears liable to give insufficient attention to requirements for power, materials, and transportation or to the choice of sites. Procedures appear to diffuse responsibility for such decisions, so that everyone, and thus no one, will be responsible if mistakes occur. 4.29 Information available to central authorities appears to be insufficient and not appropriate for making analytical choices in invest- ment, resource allocation, planning, etc. Not nearly enough is known about possibilities, requirements and alternatives at the local level. The need to choose among alternatives in project appraisal is not fully appreciated, and insufficient analytical information seems to be collected for this purpose. 4.30 Not much economy-wide information is made available to guide enter- prises, even those given wider responsibilities. Some managers have encoun- tered great difficulties in forecasting. This adds to the difficulties of new challenges for which they have no previous preparation. The Price and "Signal" System 4.31 A further source of inefficiency at all levels seems to be the distorted signals created by the system of prices, taxes, and charges (if any) for the use of resources, including capital and labor. Inevitably many - 167 - choices are made at all levels based on costs, financial returns, profits, or quantity indexes based on output value. These choices are frequently led astray as a result of a very weak and uncertain relationship in industry between money costs (or returns) and "true" scarcity values. The most obvious problem has been the lack of charges for the use of capital (except bank loans for above-plan working capital). Another difficulty is that labor costs reflect the number of workers but not the scarcity of the skills involved. Tax and revenue incentives favor small-scale local investments that may not be desirable from a wider perspective, even taking into account their employment and income distribution effects. 4.32 Prices of industrial products, which include a large markup at each stage of processing (over two thirds of value added is profits or taxes) are reportedly anomalous in regard to the difficulty of the product's manufacture; furthermore they do not reflect demand and supply. Price ratios (for example, of cotton vs. polyester fabric, or fuel oil vs. gasoline, or textile machinery vs. consumer durables) differ enormously from world trade prices (both above and below). Enterprises make expensive items for themselves to keep their costs down, though from a national viewpoint manufacture outside that enterprise would be much cheaper. Price signals can lead to decisions throughout the economy to make more of the products in excess supply, and to try to use those in scarce supply, as well as to misdirect investment. 4.33 Until this signal system can be adjusted, centralized decision making is likely to be prone to mistakes. The decentralization of decision making does not offer a satisfactory solution, since enterprise managers will be guided to make decisions that are undesirable from a national point of view. Compensating Strengths 4.34 Compensating to some extent for the problems noted, China's industrial sector is full of talented and energetic people, accustomed to carrying out ambitious tasks within the existing environment. Moreover, as a result of its disciplined, effective organizations, China can quickly concentrate resources into priority undertakings. These features set China apart from most developing countries. They become sources of great strength and dynamism whenever China's industrial efforts are well aimed and recent policies, described in Chapter 3, have been generally well aimed. - 168 - 5. ISSUES AND CHALLENGES A. Overview 5.01 The industrial sector has been at the center of discussion and actions concerning both adjustment and reform. A promising beginning has been made, but an arduous and lengthy task lies ahead. The transformation of Chi- nese manufacturing will have to be carried out with only limited investment and construction funds in a period when energy and foreign exchange will be increasingly scarce. A finely balanced approach will thus be required. 5.02 Given such challenges as modernizing industry, conserving energy and producing more consumer goods, China's industrial planners face difficult tasks. In some of these tasks, inadequate information exists to guide decisions on the direction and sequence of actions needed. Yet efforts to overcome immediate obstacles, without anticipating future obstacles, are unlikely to achieve more than a slow and uncertain advance towards long-run goals. 5.03 The inherent difficulty of the tasks ahead, and the need to look ahead and take coordinated action soon on many fronts at once, can be suggested by a list of the principal constraints on China's ability to raise aggregate output of useful industrial products within the next few years: (a) energy in all forms, with a special crunch coming in oil; (b) raw materials for light industry; (c) exports and foreign exchange; (d) construction and investment capacity, as dictated by the ability to finance investment and to supply building materials and appropriately skilled construction crews; and (e) system performance in matching output to demand, managing the financial aspects of readjustment and restructuring, coordinating different units, stimulating production in appropriate directions, and improving the quality of investment programs and project designs. Most of these constraints will continue for the next 10-15 years, and there will be time to do more about others, for example: (f) shortages of skilled people, especially managers with technical or economic training, designers, engineers and scientists; (g) lack of technical know-how, above all in fast-changing areas such as electronics, computers and precision instrumentation and control systems; (h) inadequate transport and communications networks; and (i) insufficient mining and processing of metals, ores and concentrates, such as iron ore, copper and aluminun, and fertilizer minerals (phosphates and potash). Over this longer time horizon, an opportunity also exists to overcome the obsolescence or inefficiency of much existing capacity, to implement thorough reforms, and to promote more efficient technology advances. Most of these longer term challenges also call for early action. - 169 - 5.04 In order to meet China's immediate and longer term needs in a timely fashion, even though consumer goods are given highest priority, heavy industry cannot be neglected. Machinery and equipment, in particular, are needed for many purposes - increasing coal, oil, ore and building materials production; replacing energy-inefficient capacity to achieve energy savings; building new plants to serve the raw material needs of light industry; expanding the capacity of light industry directly; and providing equipment for electric power, transportation, telecommunications, and construction. This will require both re-equipping and modernizing existing plants, and setting up new plants that embody newer technology and turn out products that will revolutionize all China's industries (for example, by introducing greater precision, electronic controls and computerized efficiency). These needs cannot be ignored if consumer goods output is to continue to rise, so the efficient use of China's limited investment and capital equipment-making capacity is vital. B. Energy Conservation 5.05 The energy shortage appears to be the biggest immediate challenge. On a national level, the overall energy supply will grow at only about 2.2% p.a. in 1980-85. This contrasts with a growth of energy supply of 10% p.a. in 1965-75 and 5.6% p.a. in 1975-80. Electricity will increase by no more than about 4.5% p.a. compared to over 11% p.a. in 1965-75 and 9% p.a. in 1975-80, so that power supplies will be extremely tight. Coal output will probably grow at about 3.3% p.a., while oil output is expected to fall from its recent peak of 106 million tons to about 100 million tons in 1985. The energy shortage will also continue in the second half of the decade, with a further decline quite likely in oil production, although growth rates of electricity and coal output are expected to be raised through increased investment. For the decade as a whole, the growth of energy supply is likely to be less than 3% p.a. 5.06 In response, during the next few years of readjustment, the indus- trial growth rate is expected to be lowered to around 5-6% p.a., with lower growth rates (in the order of 2-4% p.a.) in heavy industry and higher rates (perhaps 7-8% p.a.) in light industry. Industrial growth will then be acce- lerated somewhat, as conditions permit, in the second half of the 1980s. Projections given in the Main Report suggest that the growth rates attainable will be extremely sensitive to the degree of success achieved in energy conservation and in switching to the use of other forms of energy as a substitute for oil. With high energy savings and switching, industrial growth rates averaging 6% p.a. in 1980-85 and over 7% p.a. in 1985-90 appear attainable. By contrast, even in the second half of the decade, industrial growth would probably have to be held to about 5% p.a. if no more than moderate savings and switching can be realized. - 170 - 5.07 In the projections associated with the higher savings and faster growth scenario, heavy industry (other than electric power generation) bears the main burden of energy savings in the economy as a whole. It is assumed to reduce its use of coal and oil combined relative to final output, over the decade, by an average of 3.9%, p.a. (i.e., by nearly one third in 10 years), and light industry by about 1.6% p.a. (by 15% in 10 years)./l For all indus- try combined including power generation, the saving in coal and oil is assumed to average 2.7% p.a. over the decade./2 Meanwhile burning of crude or heavy oil directly as a fuel (in boilers, furnaces or kilns) is projected to decrease by about 12 million tons in electric power generation and by a slightly larger amount, perhaps 15 million tons, in the rest of industry. This implies that nearly two thirds of the present direct burning of oil as a fuel (a little over 40 million tons) would be eliminated, to free oil for higher priority uses. This switching process will be very important to meet fast-rising requirements for oil as a source of motor fuel (in transport, agriculture and construction) and as a feedstock in making nitrogenous fertilizer, petrochemicals, plastics and synthetic materials, which will be much needed in agriculture and light industry. 5.08 High rates of energy saving and switching appear potentially attainable in China, in view of the very high energy consumption of industry today compared to international standards, but they will not be easy. Hardly any effort was made to achieve energy conservation in China prior to 1979, when energy use per yuan of gross output was cut by 5.1%. In 1980 an even larger reduction, estimated at 7.2%, was achieved (para. 3.13). However, the bulk of this (a saving of 4.5%) came from increasing the share of light industry, and thus reducing the share of heavy industry with its greater energy demands, while 2.7% was saved within industries. Meanwhile, as already noted (para. 3.13), preliminary press reports pointed to a reduction of about 10% in oil use per unit of gross industrial output. 5.09 In its current programs, China is holding down energy requirements in several ways: overall growth of industrial output is being reduced; the composition of output is being diverted from energy-intensive products; /1 For underlying assumptions see Annex E, "The Energy Sector," paras. 1.30-1.45. Such a high rate of energy savings would not be required in industry, if energy output (and especially coal output) can be raised higher than projected, or if economies can be achieved - beyond those assumed in the projections - in the use of energy in other sectors. The main alternative areas for savings of coal would be thermal power generation, where modest energy savings are assumed to take place, and household use. A reduction in the rate of growth - particularly in heavy industry - would be an alternative way to ease the pressure. /2 Computed from data from Annex E, Tables 1.8 and 3.1, calorie equivalents from Table 1.1, and the underlying assumptions. Roughly one fifth of this saving comes from increasing light industry-s share of the total industrial output. - 171 - orders are being directed to the more energy-efficient plants, while produc- tion is reduced in the most energy inefficient plants; and practices are being improved to save energy in existing furnaces and boilers. Upper limits are being placed on energy to be used per ton in making such products as pig iron or nitrogenous fertilizer; if these limits are exceeded, plants are likely to be closed. Also, new energy-saving investments are beginning to be made. 5.10 As in other countries, there is much scope for energy savings throughout industry at low cost by such simple means as waste heat recovery, better insulation, and improved operating procedures (for example, better preparation of raw materials, better furnace maintenance, procedural or valve system readjustments to avoid heat losses, and reduced wastage of metal and other materials in manufacturing). Moreover, compared to most countries, China has many plants (notably small ones) that consume inordinate amounts of energy relative to output. Thus large savings could be accomplished by closing these plants or reducing their output, though this would require careful planning and expansion of transportation to serve the same markets from energy-efficient plants. In addition, with suitable investments, substantial energy savings could be obtained by modifying existing plants. Examples of this include: replacing the least efficient of China's 180,000 industrial boilers; using heat and steam along with other by-products that are now wasted, for instance through cogeneration of steam in power plants or generation of power from blast furnace gas; and converting to processes that are more energy-efficient, such as conversion from wet to dry process with cold firing and preheaters in cement making and to coke dry-quenching or use of oxygen converters in place of open-hearth furnaces (and increased use of continuous casting) in steelmaking. Energy can also be conserved by switching to product designs that require less or different materials and thus, indirectly, less energy. Improved standard designs of equipment such as boilers and stoves are much needed. 5.11 In China as in most countries, a majority of the energy used in manufacturing is consumed by a small number of energy-intensive industries, including iron and steel, chemicals and fertilizers, petroleum refining, nonferrous metals, pulp and paper, and nonmetallic building materials. Many of these industries now use energy very inefficiently by international standards (paras. 2.33 and 2.34). An energy conservation program in China will have to include detailed programs to increase energy efficiency in each of these industries, analyzing energy consumption, identifying major potential sources of energy savings and switching, and instituting improved monitoring systems and exchange of information on conservation and switching programs as they develop. Such plans could also assess costs and benefits at alternate prices, determine the most economical way of modernizing and restructuring the industry with energy conservation as the focal point, and identify a plan of action for each plant, as well as providing for the needed equipment supply, - 172 - instrumentation, transportation, coordination among ministries, and implemen- tation. In each industry the plan should cover financial arrangements, inclu- ding long-term loans for the required investments, and appropriate incentives for enterprises, such as higher profit retention rates and accelerated depre- ciation schemes. 5.12 Measures are also needed in other industries to economize on their use of energy-intensive materials, and to encourage, evaluate, facilitate and finance many small, decentralized investments to save and switch energy. 5.13 Switching from oil to coal as a fuel on the scale envisioned will be particularly difficult and will require both strong incentives and substantial investment. After all, oil is an easier and cleaner fuel to use than coal: transportation, handling, storage, firing, flame and temperature control, and ash disposal are all troublesome when coal is burned, and a larger scale of output tends to be required to achieve comparable heat efficiency. Moreover, increasing the use of coal in place of oil as fuel requires the conversion of existing boilers and other units, or closing down oil-fired plants in favor of new coal-fired ones. 5.14 The existing structure of energy prices is likely to prove a serious obstacle. No financial incentive now exists in China to switch from oil to coal, since fuel oil is actually cheaper (per calorie of heat) than coal. This is in sharp contrast to the situation in most countries. Moreover, Chinese prices of coal, crude oil, and electricity for industrial use are also low at official exchange rates, compared to international prices,/1 and probably also compared to the prices of equipment and materials required in energy-saving investments. Thus, energy price adjustments could potentially make an important contribution to success in energy saving and switching. In adjusting energy prices, an interim two-tier pricing system might prove useful, with a gradually increasing (though still subsidized) base price for below-quota consumption and a sharply higher price for amounts con- sumed in excess of quotas. The quotas could then be tightened year by year. C. Raw Materials for Consumer Goods 5.15 Another big problem in the immediate future is to expand the supply of raw materials for light industry. A growth rate of 7-8% p.a. in light industry would probably imply a growth of 5-6% p.a. in raw materials required. Much of the output in light industry comes from branches based on agricultural raw materials, such as foods, natural fibers, and animal hides. An increasing share, however, comes from branches based on industrial materials, defined to include some natural substances such as timber and paper pulp, as well as metals, plastics or chemical fibers. Imported /1 See the Main Report, Table 6.2, or Annex E, Table 1.5. - 173 - materials have been used increasingly in the last two years to augment domestic supplies. (This has had an effect on world prices, notably raising the price of cotton, of which China now buys about 20-25% of the amount sold internationally; although this share is expected now to fall). 5.16 Material shortages are due in part to the difficulties of increas- ing agricultural output, while limited foreign exchange resources restrict imports. In some crucial raw materials, progress is being made; thus in 1980 China managed to increase cotton output by 22.7% over 1979 levels, from 2.207 million tons to 2.707 million tons largely through yield increases; and a larger area has been planted in 1981. Official targets call for further large increases in fiber supplies by 1985, of which about 200,000 tons will come from chemical fiber capacity due to come on stream by 1983. But such successes are rare and, to the extent that they require diversion of scarce farmland, can only be achieved at the cost of reduced farm production. 5.17 Other natural materials in short supply include wool, silk, leather, timber, alternative sources of cellulose (such as reeds and crop residues), and various foodstuffs. The production of some of these materials is difficult to increase quickly; thus the supply of wood can only be increased over the longer term, say ten years, by planting quick-growing trees in South China now. To serve the paper industry, where demand greatly exceeds the supply of raw materials, more reeds must be cultivated and technology must be mastered to make newsprint from bagasse. For some materials, such as leather and wool, the quality of processing needs to be improved at each stage. Provision of inputs to expand agricultural output is now a high priority in industry. Industrial centers are also being encouraged to make special arrangements with regions producing needed raw materials, supplying them with technical assistance, equipment and consumer goods in exchange for raw materials. 5.18 There is potentially more flexibility in the supply of industrially based inputs, but capacity limitations (for example, cold reduction mills to produce sheet steel and tinplate), initial learning difficulties in new plants, and outdated allocation patterns have been holding back output growth in key subsectors. There has been a reluc- tance to continue expanding capacity in the petrochemical, synthetic fiber, plastics, and other synthetic materials industries, because declining oil output has made feedstocks scarce. But these petrochemical-based materials are usually more energy efficient than the natural resource-based or metal products that are their closest substitutes, and they often also - 174 - have other advantages./1 Thus, capacity expansion to meet the needs of light /1 By way of example, in 1978 the US National Science Foundation, in examining the relative energy intensiveness of cotton and polyester fibers, concluded that 25% more energy is required to make a polyester cotton blend shirt than to make one entirely of cotton. But since polyester cotton fabrics are twice as durable and require less maintenance than all-cotton fabrics, the life cycle energy requirement of all-cotton clothing in the USA was estimated to be as much as 90% higher than that of blended clothing. This somewhat surprising result is due to the high energy requirement of cotton production, taking into account energy used in fertilizers and pesticides and power used in irrigation. Further useful comparisons are as follows (based on Kunststoffe No. 69, 1979, p. 419, and Chemical Week, March 28, 1979, p. 20): Energy Requirement for Fabricated Products Energy consumption Product Unit (Oil tons equivalent) Polypropylene film 1 million sq m of 110 Cellulose film packaging material 155 Polyethylene 1 million fertilizer 470 Paper sacks sacks 700 Polyethylene pipe 100 km of 1" pipe 120 Cahamsed steel pipe 500 PVC pipe 100 km of 4" drainage 360 Cast iron pipe pipe with fittings 1,970 PVC 1 million 1 liter bottles 97 Glass 230 Comparison of Energy Consumption for Metal and Plastics Coal ton equivalent/m 3 Metals Aluminum 22.6 Copper 16.0 Zinc 13.0 Steel 11.7 Plastics Polystyrene (PS) 5.1 Polyvinyl Chloride (PVC) 4.0 Polypropylene (PP) 3.4 High density Polyethylene (HDPE) 3.4 Low density Polyethylene (LDPE) 3.1 - 175 - industry may be desirable, even if the feedstock must come from imports or reduced exports. As in much of China's industrial sector, however, signifi- cant imbalances exist within the relevant industries, so that some petro- chemicals (including polyester chips for making synthetic fiber) must be exported for lack of domestic demand. Initially, investment appears to be needed principally in "downstream" capacity - for example, plastics and their products, and synthetic fibers and yarn. 5.19 Material shortages can also be counteracted by expanding the output of consumer goods that have a high input of human capital (skills and technical know-how). This involves improving the quality of finished products and continuing to expand the supply of light engineering products (as in consumer electronics) that have high values relative to the cost of the materials used. D. Manufactured Exports 5.20 A third immediate challenge is to expand manufactured exports. China is likely to encounter severe shortages of foreign exchange over the next decade as exports of oil and petroleum products, which made up about one quarter of the country's exports in 1980, decline and are perhaps replaced by net imports, due to falling oil output. Rapid expansion of manufactured exports would allow China to maintain or increase its capacity to buy imports other than oil. China's potential for expanding exports appears excellent, given its abundance of low-wage workers, its shop-floor skills and craftsman- ship, its large underutilized capacity, and its enormous potential for economies of scale. Market prospects are generally good: the volume of manufactured exports from all developing countries is expected to grow through 1990 by at least 10% per year, if protectionist trade barriers in industria- lized market economies do not increase significantly. China's share of world markets is still miniscule in most of the labor-intensive light industries; and even in textiles, the quotas already in force against China leave considerable room for export expansion. There are very promising long-run prospects for exporting machinery, equipment and components, for which the world market is huge and has few restrictions. 5.21 But China's finished manufactured goods (both consumer goods and capital equipment) tend to be deficient or unsatisfactory, by international standards, in their design, if not in their performance characteristics then at least in styling. Though they may be well suited to Chinese tastes and conditions, they usually appeal only to overseas Chinese or people in the poorest developing countries. To expand exports swiftly, Chinese industries must produce goods styled and designed for the world's bigger and more open markets. This will require measures to increase the exposure of Chinese manufacturers and designers to foreign manufacturing methods, product designs, tastes, styles and practical requirements, as well as direct measures to strengthen Chinese design capabilities. These measures are also important because updating Chinese product designs can lead directly to modernizing equipment and improving consumer goods for domestic use. - 176 - 5.22 Manufacturers need to be allowed to use imported components and materials to produce exports, particularly where Chinese alternatives are inferior or poorly suited to customer requirements. This is allowed in most other countries producing manufactured goods for export. The possibility of supplying the same inputs in China, in competition with imported inputs, could then be promoted, for example, by cancelling indirect taxes and reducing profit markups on inputs used in making exports. Chinese exports are often eliminated from the market or their value is greatly reduced because of deficiencies in small components or raw materials, or for lack of some feature (such as numerical controls on machine tools) that could be added by using imported accessories. 5.23 Export procedures and organization also appear to be seriously deficient by international standards. Procedures can be tedious and slow, but even more serious is the almost complete lack of direct contact between Chinese manufacturers and foreign buyers (several layers of official bureaucracy may separate the two). This prevents China from attracting potential export customers, most of whom want to work directly with their suppliers, and from capitalizing on a very important potential source of free technology, training and manufacturing advice. Arrangements for marketing need to be strengthened, as do those that provide services and spare parts to foreign buyers. Here again, there is a need for participation (and travel) by the manufacturers and their technical experts. 5.24 In addition, exports are hampered by shortages of packing and packaging materials; by shortcomings of anti-shrink equipment in textile finishing; and sometimes by transport difficulties. The price of labor in the new export processing zones on the south coast near Hong Kong may have been artificially set too high; minimum labor costs, computed at $1.06 per hour in one foreign study, are at least double those in some of the competing export zones in other parts of the world, and are high relative to those in the rest of China. Nevertheless, considerable export increases can be expected as a result of these zones and all the other measures already taken to stimulate exports. 5.25 The possibility is now being discussed in China of turning 3-6 cities on or near the coast, including Shanghai and Tianjin, into special export-oriented cities, with revised institutional arrangements intended to allow them to emulate the manufactured export success of Hong Kong. If this could be effectively done it could potentially have an enormous impact on China's exports and economic growth. E. Technology Acquisition 5.26 Chinese manufacturing methods and product designs are far from stagnant. Technology acquisition is being actively pursued in most indus- tries. But the process needs to be made more cost effective and quicker, so - 177 - as not to hold back progress in linked industries. Increased success in this area depends on measures to increase incentives and reduce practical obstacles to introducing and spreading innovations, along with increased direct contact with foreign methods and ideas; it calls for revised rules for the small amounts of investment needed in many cases to implement improvements; and finally it requires improving the quality of decisions on whether, when and how to purchase technology from abroad - decisions that are inherently complex because of the many economic, practical, and technological considerations involved. 5.27 In this regard, China could sometimes benefit from expert foreign consultant advice. In some cases, for example, it may be cheaper to bring in people familiar with needed technology, or to build up Chinese exports as part of an exchange - for instance, by exporting "software" in exchange for technology in the electronics or computer industries. It is also important to anticipate problems of assimilation and repercussions on surrounding processes, and to judge whether or not particular foreign technologies are appropriate in Chinese circumstances, or can serve as a springboard for further advances. Some Chinese enterprises are struggling with advanced borrowed technology, largely because essential complementary inputs are difficult to get. 5.28 Some Chinese industries are technologically backward in ways that handicap other industries around them, while their backwardness and isolation make their own technical experts an unreliable source of guidance on what is needed. Some of these lags involve whole systems of which manufacturing is only one part - for example, road transport or telecommunications. But creating a more up-to-date system is complicated by the need for coordinated action by several different organizations - the people who provide metals, rubber and plastic component materials for motor trucks, those who must supply new types of motor fuel, the truck and component manufacturers, the highway and bridge builders, and the organizations that operate trucks, supply repair services, and stock spare parts. 5.29 Newly emerging and rapidly changing fields of technology are likewise encountering difficulty in China if they cut across existing organizational lines. Thus, in the semiconductor industry, there is a need to improve the quality of silicon crystals (now made by the Ministry of Metallurgical Industry) and pure chemicals (now supplied by the Ministry of Chemical Industry), and to acquire technology and construct super-clean and vibration-free buildings for manufacturing (by the Fourth Ministry of Machine Building, except where other users are trying to acquire their own capabilities). (In other countries the crystals and pure chemicals are usually made along with the chips.) It is necessary simultaneously to build forward links to potential users in several separate industries, each struggling with its own technological problems - such as the computer and associated software industries, and those making precision instruments and control systems. Compared to a market system, reassignment and coordination of responsibility, and creation of new organizations, are difficult in China, - 178 - while the forces working to create geographical agglomerations of specialized but complementary enterprises, which could advance their related technologies together, are practically absent. Thus technological advance can easily be held back by fragmentation and bureaucratism, especially in areas where existing organizations are weak or poorly coordinated. F. Restructuring 5.30 A related difficult task is the physical restructuring of China's industries, as well as the reassignment of labor that becomes redundant or unproductive. Some restructuring is already taking place, through efforts to create a greater division of labor (including networks of parts suppliers); through creation of new corporations that can potentially shift resources among their component enterprises; through "socialist competition" for markets; through closing some inefficient enterprises, and giving reduced or different tasks to others; through efforts to prevent the proliferation of small plants where they are redundant, but to create more of them where they complement large plants; and through further construction of modern, large plants. This process could be made more cost effective by the development of appropriate rules and procedures for scrapping and replacing old capacity. 5.31 A more difficult challenge, however, is the reassignment of workers in redundant or unproductive jobs, including those at plants that are closed down. Throughout China, there are already many idle or underemployed workers using scarce housing, food, services and public facilities, and even many skilled technical people who are underemployed, particularly in heavy indus- tries that are being cut back; some should be reassigned to the expanding industries or switched into new tasks. More generally, the existing system of labor assignment appears too rigid for the needs of an advancing industrial sector. New arrangements, under which people - especially those with scarce skills - are transferred more often, may be needed to help spread technical know-how and high standards from one enterprise to another, and to allow scarce manpower to be redeployed as needs shift. G. Reforms and Improved-Management 5.32 In addition to these specific challenges, there is also a more generalized need for reforms to improve the management and performance of the industrial sector. Of particular importance are improvements in project design and appraisal, investment planning, and resource allocation; asso- ciated improvements in management methods and information flows; and reform of prices, taxes and other indicators used by decision makers at all levels. - 179 - 5.33 On the analytical side of decision making, advice from outside experts might prove extremely useful in determining information to be gathered and ways of processing it to help guide decisions, together with methods and uses of formal modeling, and techniques for the conceptual analysis of choices. Particularly crucial may be improvements in the design and appraisal of investment projects. H. Price and Tax Reforms 5.34 Perhaps the most difficult of all reforms, for political as well as economic reasons, is the reform of prices and taxes. The inability to achieve this has forced the Chinese authorities to continue to rely mainly on old methods and very imperfect information, particularly in the management of resources that are scarce but underpriced. 5.35 An important step now being introduced is the imposition of charges for the use of fixed capital assets, and the use of loans which have to be repaid as a basis for new investments. But to complement these steps, the entire structure of industrial prices and taxes needs to be revised. This is especially difficult since prices in China play a role in distributing income and funds for potential investment and production uses among ministries and other organizational units of all sizes. Thus, price changes are likely to encounter much resistance. 5.36 What may be needed is to map out an entirely new structure and price strategy in advance, and then to move towards it, first, by shifting to a consistent system of "shadow prices" in investment decisions and planning calculations, and in accounting calculations designed to judge enterprise performance, and second, by adjusting actual prices in a series of steps in which some prices go up and others down, leaving the overall level unchanged, while finding ways of preserving equity among the organizations involved. The new structure could be as follows. The prices of internationally tradeable raw materials could be roughly aligned with international prices that reflect the usual tradeoffs for China in the international market. Charges could be imposed for the use of scarce capital and other scarce resources, such as highly skilled labor. Price markups at successive intermediate stages of manufacturing could be reduced, and anomalies could be eliminated, in the light of cost comparisons and input-output relationships as well as prices abroad. Where distributive implications of the new prices are unacceptable, two-tiered prices can be introduced as a second-best measure. Indirect taxation could be converted to a value-added tax, large enough to cut further into profit margins in manufacturing, augmented by additional taxes on finished products, to maintain the overall tax yield. (This is important since revenue from industry is crucial for China's national budget.) Tax advantages now given to small-scale as against large-scale plants could be reduced or eliminated, and tax holidays could be given only in industries requiring capacity expansion. - 180 - 5.37 The optimal price structure will not be immutable. Further adjustments will be required to reflect trends in international prices, costs, and the relative scarcity of different products. But these adjustments can be made on the same principles, while using systematic changes in the exchange rate to buffer against inflationary influences from abroad, as has often been done in the past. A special advantage from China's present price system is that there is an opportunity to introduce new constant prices, while revising accounting procedures; thus it should be feasible to judge an enterprise's performance on the basis of a dual system of prices, substitu- ting forward-looking for backward-looking (1970) accounting prices. 5.38 Putting a more modern price system into place would allow progres- sive decentralization of decisions that can best be made at the enterprise and local levels, and would give much better guidance to central decision makers in the selection of investments. Indeed, it should be possible to reduce the demand for new investments to more nearly match the potentially available supply of funds, while helping to assure that scarce resources are not wasted in either investment or production. Like some other needed improvements, the creation and design of an improved industrial price and tax system would undoubtedly benefit from expert outside advice, which in turn would have to be adjusted to the underlying goals and preferences of the Chinese authorities. Annex E Energy Sector Contents 1. OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 Energy Production and Consumption . . . . . . . . . . . . . . 187 Importance in the Economy . . . . . . . . . . . . . . . . . . 187 Historic Growth Rates . . . . . . . . . . . . . . . . . . . . 189 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Technology . . . . . . . . . . . . . . . . . . . . . . . . . 192 Institutions . . . . . . . . . . . . . . . . . . . . . . . . 192 Investment Planning . . . . . . . . . . . . . . . . . . . . . 193 Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 Energy Consumption in Relation to GNP . . . . . . . . . . . . 198 Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . 200 2. COAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Introduction . . . . . . . . . . . . . . . . . . . . . . . . 211 Organization . . . . . . . . . . . . . . . . . . . . . . . . 211 Employment Conditions . . . . . . . . . . . . . . . . . . . . 212 Production . . . . . . . . . . . . . . . . . . . . . . . . . 212 Coal Quality . . . . . . . . . . . . . . . . . . . . . . . . 215 Transportation . . . . . . . . . . . . . . . . . . . . . . . 216 Consumption . . . . . . . . . . . . . . . . . . . . . . . . . 217 Export Prospects . . . . . . . . . . . . . . . . . . . . . . 217 Productivity . . . . . . . . . . . . . . . . . . . . . . . . 217 Prospects and Recommendations . . . . . . . . . . . . . . . . 218 Capital Requirements . . . . . . . . . . . . . . . . . . . . 219 3. PETROLEUM . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 Sector Development . . . . . . . . . . . . . . . . . . . . . 221 Organization . . . . . . . . . . . . . . . . . . . . . . . . 221 Exploration . . . . . . . . . . . . . . . . . . . . . . . . . 222 Production . . . . . . . . . . . . . . . . . . . . . . . . . 223 Quality of Crude Oil . . . . . . . . . . . . . . . . . . . . 226 Equipment and Methods . . . . . . . . . . . . . . . . . . . . 226 Consumption . . . . . . . . . . . . . . . . . . . . . . . . . 227 Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . 228 Oil and Gas Reserves . . . . . . . . . . . . . . . . . . . . 229 Pipelines and Refineries . . . . . . . . . . . . . . . . . . 230 Oil Shale . . . . . . . . . . . . . . . . . . . . . . . . . . 232 Recommendations . . . . . . . . . . . . . . . . . . . . . . . 233 Investment Requirements . . . . . . . . . . . . . . . . . . . 234 - 183 - - 184 - 4. ELECTRICITY . . . . . . . . . . . . . . . . . . . . . . . . . . 234 Sector Development . . . . . . . . . . . . . . . . . . . . . 234 Organization . . . . . . . . . . . . . . . . . . . . . . . . 235 Consumption Pattern . . . . . . . . . . . . . . . . . . . . . 235 System Description . . . . . . . . . . . . . . . . . . . . . 236 Fuel Consumption . . . . . . . . . . . . . . . . . . . . . . 237 Capacity Utilization . . . . . . . . . . . . . . . . . . . . 238 Demand Management . . . . . . . . . . . . . . . . . . . . . . 238 Prospects and Recommendations . . . . . . . . . . . . . . . . 238 5. OTHER SOURCES OF ENERGY . . . . . . . . . . . . . . . . . . . . 241 Geothermal . . . . . . . . . . . . . . . . . . . . . . . . . 241 Noncommercial Energy . . . . . . . . . . . . . . . . . . . . 241 TABLES IN TEXT 1.1 Energy Balances, 1979 . . . . . . . . . . . . . . . . . . . . 188 1.2 Energy Production Growth Rates, 1952-80 . . . . . . . . . . . 190 1.3 Composition of Primary Energy Production, 1952-80 . . . . . . 190 1.4 Regional Distribution of Reserves . . . . . . . . . . . . . . 191 1.5 Price Comparisons . . . . . . . . . . . . . . . . . . . . . . 196 1.6 Energy Intensity of Major Developing Country Economies, 1978 198 1.7 Alternative Estimates of 1985 and 1990 Oil and Coal Balances 201 1.8 Construction of 1985 and 1990 Oil and Coal Balance Estimates 202 1.9 Summary Table of Energy Saving and Switching Assumptions for Oil and Coal in the Moderate and High Energy Savings Scenarios. . . . . . . . . . . . . . . . . . . . . . . . . . 208 1.10 Levels of Conservation Implied in Demand Projections . . . . . 210 2.1 Recoverable Reserves of Coal . . . . . . . . . . . . . . . . . 211 2.2 Coal Production, 1955-80 . . . . . . . . . . . . . . . . . . . 213 2.3 Underground Coal Mines in Operation . . . . . . . . . . . . . 214 2.4 Raw Coal Analyses . . . . . . . . . . . . . . . . . . . . . . 215 2.5 Coal Consumption by Sector, 1976-78. . . . . . . . . . . . . . 216 2.6 Coal Industry Employment, 1975-79. . . . . . . . . . . . . . . 218 2.7 Major Coal Mine Projects . . . . . . . . . . . . . . . . . . . 220 2.8 Investment in the Coal Industry, 1976-80 . . . . . . . . . . . 221 - 185 - 3.1 Crude Oil Production by Region and Major Fields, 1977-80 . . . 224 3.2 Oil Balances, 1979 . . . . . . . . . . . . . . . . . . . . . . 228 3.3 Natural Gas Production . . . . . . . . . . . . . . 229 3.4 Tentative Estimates of Oil and Natural Gas Reerves. . . . . . 230 3.5 Output of Principal Refined Petroleum Products . . . . . . . . 231 3.6 Shale Oil Production . . . . . . . . . . . . . . . . . . . . . 233 3.7 Investment for Exploration, Development and Refineries . . . . 234 4.1 Major Electrical Grids, 1979 . . . . . . . . . . . . . . . . . 236 APPENDIX TABLES AND CHART A.1 Growth of Energy Production, 1952-80 . . . . . . . . . . . . 243 A.2 Energy Sector Investments, 1977-79 . . . . . . . . . . . . . 244 A.3 Oil Exports, 1975-80 . . . . . . . . . . . . . . . . . . . . 245 A.4 Number of Underground Coal Mines in Operation, 1975-79. . . 246 A.5 Coal Production by Type and Size of Mine, 1970-80 . . . . . . 247 A.6 Lignite Production by Province, 1955-79 . . . . . . . . . . . 248 A.7 Anthracite Coal Production by Province, 1955-79 . . . . . . . 249 A.8 Bituminous Steam Coal Production by Province, 1952-79 . . . . 250 A.9 Coking Coal Production by Province, 1955-79 . . . . . . . . . 251 A.10 Employment in Coal Mining, 1970-79. . . . . . . . . . . . . . 252 A.11 Coal Exploration Effort, 1970-79 . . . . . . . . . . . . . . 253 A.12 Coal Investment by Region, 1970-80e . . . . . . . . . . . . . 254 A.13 Major Power Stations in China, 1979 . . . . . . . . . . . . . 255 A.14 Electricity Generation and Installed Generating Capacity, 1949-79 . . . . . . . . . . . . . . . . . . . . . . . . . . 258 A.15 Hydro and Thermal Electricity Generation by Region, 1970-79 . 259 A.16 Hydro and Thermal Installed Capacity by Region, 1970-79 . . . 260 A.17 Generating Capacity by Size of Unit, 1979 . . . . . . . . . . 261 A.18 Power Station Fuel Consumption and Efficiency, 1979 . . . . . 262 A.19 Electricity Sales by Consumer Category, 1949-79 . . . . . . . 263 A.20 Electrification of Communes and Brigades by Region, 1979. . . 264 A.21 Electricity Tariffs, 1980 . . . . . . . . . . . . . . . . . . 265 A.22 Electricity Investment, 1975-79 . . . . . . . . . . . . . . . 266 A.23 Electricity Industry Staff, 1979 . . . . . . . . . . . . . . 267 A.24 Theoretical, Exploitable, and Investigated Hydro Potential by Region . . . . . . . . . . . . . . . . . . . . . . . . . 268 A.25 Additions to Generating Capacity Anticipated Before 1985, by Region . . . . . . . . . . . . . . . . . . . . . . . . . 269 - 186 - CHART Ministry of Electric Power Organization Chart . . . . . . . . . . 270 MAPS (Located at the end of Volume II) IBRD 15524R3: China - Power Grids and Major Power Stations, 1979 IBRD 15627R2: China - Coal and Lignite Production by Province, 1979 IBRD 15628R2: China - Major Oil Field and Oil production by Region, 1979 1. OVERVIEW Energy Production and Consumption 1.01 China is the world's third largest consumer of commercial energy, following the USA and the USSR, and, at least at present, it produces more than it consumes. Production and consumption in 1979,are estimated at 649 million tons of coal equivalent (Mtce) and 621 Mtce, respectively. Consump- tion per capita, at about 644 kgce, was close to the average for developing countries in 1979 but it is high per dollar of estimated GNP (about 2.5 kgce); the corresponding averages for developing countries as defined in the World Bank's World Development Report, 1980 (WDR, 1980) are about 620 kgce/capita and 0.9 kgce/$. Industry /1 is the dominant energy consumer, accounting for 72% of the "commercial" total. Household and commercial uses consume about 14%, followed by agriculture /2 (6%) and transportation (5%). 1.02 Table 1.1 shows estimated commercial energy balances. Coal is the main source of energy: production in 1979 was about 635 million tons or 454 Mtce./3 Production of oil, the second largest source, was about 106 million tons or 155 Mtce. Natural gas production amounted to about 14.5 billion m3 or 19 Mtce and hydroelectricity to 50 TWh (50 billion kWh) or 21 Mtce. 1.03 "Noncommercial" energy sources comprise mainly rice straw and other crop residues, firewood and animal wastes. Together they supplied 250 Mtce of energy (unofficial estimate), which is comparable on a per capita basis with estimates for other low-income, densely populated developing countries. Importance in the Economy 1.04 The energy sector in China is important not only as a producer of essential products but also as a direct contributor to GNP, as a foreign exchange earner, and as a consumer of investment funds. The sector accounted for about 12% of the 1979 gross value of industrial output in /1 Including here mining, but excluding electricity generation, which is generally counted as part of industry in Chinese statistics. /2 The data for agriculture include rural consumption of electricity in brigade industries, other sideline activities, and household and commercial uses; in oil, where agriculture is computed as a residual, they probably also include oil used in construction. /3 Assuming, in the absence of an official estimate, that Chinese coal averages 5 million kcal per ton, compared with 7 million kcal per ton of "standard" coal or "coal equivalent." - 187 - - 188 - Table 1.1: ENERGY BALANCES, 1979 Total Noncom- Natural Electricity commercial mercial Coal Oil gas Hydro Total energy energy Total (mn tons) (bn m3) -- (TWh) -- Primary Production 635 106 15 50 n.a. Net consumption 630 89 15 n.a. 282 Power system 111 17 2 n.a. 43 Industry 385 43 13 n.a. 184 Transport 25 14 n.a. 1 Agriculture and other .. 14 n.a. 38 Domestic and commercial 109 1 n.a. 15 Exports 5 17 n.a. -------------------------- (Mtee) -------------------------- Primary production 454 155 19 21 n.a. 649 250 899 Net consumption 451 130 19 n.a. 119 621 250 871 Power system 71 25 2 n.a. 18 18 0 18 Industry 289 62 17 n.a. 78 446 n.a. 446 Transport 12 21 .. n.a. 1 34 n.a. 34 Agriculture and other .. 20 .. n.a. 16 36 n.a. 36 Domestic and commercial 79 2 .. n.a. 6 87 250 337 Exports 3 25 .. n.a. .. 28 - 28 Notes: Mtce defined as 7 million kcal. Calorific values assumed as follows: Coal (overall) 5,000 kcal/kg Coal (used in power plants) 4,476 kcal/kg Coal (used in industry) 5,250 kcal/kg Coal (used in railways) 3,370 kcal/kg Coal (remaining) 5,090 kcal/kg Crude oil and oil used in power plants and industry 10,200 kcal/kg Oil used in other sectors & refined product exports 11,400 kcal/k Natural gas 9,310 kcal/m Hydro and electricity 2,954 kcal/kWh Double-counting of electricity and the primary energy forms from which it is produced has been avoided in arriving at totals. The power system's electricity consumption is composed of transmission losses (11 Mtce) and generating plant uses (7 Mtce). The contribution of thermal power plants with a capacity of under 6 MW (4.1 Mtce or 3.4% of total electric output) is assumed to be produced at the same heat rate as production from larger plants, using the same propor- tions of coal, oil, and natural gas. Sources: Ministries of Coal Industry, Electric Power, Petroleum Industry, and Railways, and mission estimates. - 189 - 1970 prices and invested an average of about $7-8 billion per year /1 in 1978/79, or nearly 3% of GNP. In other developing countries, investment in the energy sector is estimated to have averaged about 1.7% of GNP in 1980./2 The distribution of energy investments appears to differ from that of other developing countries, although the data may reflect differences in accounting practices as well as in substance. Electric power, for instance, absorbs only about 40-45% of sectoral investment,/3 in contrast with 75-80% in many other developing countries. Energy exports (virtually all oil exports) in 1980 appear to have been worth $4-5 billion (about 25% of total merchandise exports). Employment in the sector totals about 6 million workers, over 4 million of whom work in the coal industry. Historic Growth Rates 1.05 From 1952 to 1975 energy production grew at about 10.5 % p.a., but in the last five years the growth rate has been only 5.6%. Total production actually declined by 1.3% in 1980 from the 1979 level (from about 649 to 641 Mtce). Output fell by 2.4% in coal, 0.2% in crude oil, and 1.7% in natural gas, while electricity output rose by 6.6%, with the help of a 16.1% increase in hydroelectric output./4 Table 1.2 shows key energy production growth rates for 1952-80. /1 These numbers include petroleum refining. The investment figures are as reported by the ministries concerned and converted at Y 1.5 = $1.0. They may include more housing, social services and machine-supplying industrial investments, but less transportation infrastructure expenditure, than would be included in Western practice. Also, Chinese prices seem to exaggerate the value of industrial goods relative to GNP; but this might not be true on average in this case. /2 Derived from World Bank, Energy in the Developing Countries, August 1980 estimate of investment and WDR, 1980 GNP estimates. The projections in these reports imply that energy investment in other developing countries will, however, need to be raised to 2.5%-3.0% of GNP by the late 1980s. /3 Based on the total for electric power; petroleum exploration, development and refineries; and coal. /4 See Annex D, "Challenges and Achievements in Industry," Table 1.2; for hydroelectric growth, Appendix Tables A.1 and A.19. - 190 - Table 1.2: ENERGY PRODUCTION GROWTH RATES, 1952-80 (% p.a.) Natural Total Period Electricity /a Hydro Coal Oil /b gas primary /c 1952-65 18.7 17.6 10.1 28.5 46.2 10.9 1965-70 11.4 14.5 8.8 22.1 20.9 10.6 1970-75 11.1 18.4 6.4 20.2 25.3 9.5 1975-80 8.9 4.1 5.2 6.6 10.0 5.6 1952-80 14.2 14.7 8.3 21.7 30.7 9.6 /a Hydro and thermal. /b Includes shale oil. Ic Includes hydro but not thermal electricity. Source: Appendix Table A.1 1.06 Coal production grew at an average annual rate of over 8% p.a. over the period, and yet fell in relative terms from over 97% of primary energy production in 1952 to 69% in 1980. Over the same period, oil production grew at an average rate of nearly 22% p.a. and moved from 1.3% to 24% of total primary production. Hydro and natural gas production also grew rapidly, but in 1980 these sources still contributed only 3.8% and 3%, respectively. Table 1.3 shows how the relative shares of the various sources of primary energy have evolved since 1952. Table 1.3: COMPOSITION OF PRIMARY ENERGY PRODUCTION, 1952-80 (%) Coal Oil Natural gas Hydro 1952 97.6 1.3 .. 1.1 1957 95.7 2.2 0.1 2.0 1965 88.1 8.8 0.8 2.3 1970 81.6 14.4 1.2 2.8 1975 70.5 23.0 2.4 4.1 1980 69.1 24.1 3.0 3.8 Source: Appendix Table A.1. - 191 - Reserves 1.07 The known reserves of coal and hydroelectric potential are very large and should allow considerable expansion of production, while those for oil and gas development are quite limited in relation to current production rates. Coal and lignite reserves are estimated at about 600 bil- lion tons (416,000 Mtce), while exploitable hydro potential is estimated at 1.9 trillion kWh/yr (81,000 Mtce). Our best but very uncertain estimates of known oil and gas reserves, based on the limited information available, are 1.8 billion tons (2,720 Mtce) and 130 billion m3 (175 Mtce), respectively. Information on nuclear fuel reserves is not available. Table 1.4 shows the estimated distribution of coal, oil, gas and hydroelectric resources. Table 1.4: REGIONAL DISTRIBUTION OF RESERVES (Mtce) Recoverable Exploitable coal and hydro- Recoverable Recoverable Region lignite electric oil gas Total Northeast 13,500 1,600 1,095 33 16,200 North 273,900 1,000 570 7 275,500 Subtotal 287,400 2,600 1,665 40 291,700 East 29,100 2,900 375 18 32,400 Central-South 15,600 12,600 120 3 28,300 Subtotal 44,700 15,500 495 21 60,700 Northwest 39,000 8,000 540 20 47,600 Southwest 45,000 55,100 20 94 100,200 Subtotal 84,000 63,100 560 114 147,800 Total 416,100 81,200 2,720 175 500,200 Notes: Coal is assumed to average 5 million kcal/ton and lignite 3.33 million kcal/ton. Hydro reservoir life is assumed as 100 years. Shale is not included. Sources: Tables 2.1, 3.4 and Appendix Table A.24. 1.08 Geographical considerations inhibit the development of many of these resources. While coal resources are widespread, the largest and richest deposits are concentrated in the north. This results in a need to - 192 - balance the higher cost of mining the lower grade coal generally found in the south against the transportation costs involved in supplying southern markets from northern mines. Some 70% of the hydroelectric potential is in the south- west region, principally Xizang (Tibet), 2,000 km from the major Chinese markets. In the petroleum subsector, about 75% of the proven reserves are in fields in the northeast or within about 200 km of the Bo Hai; these fields are linked to markets as far south as Nanjing by pipeline. Exploration for and development of reserves in the northwest has been much less thorough due to transportation and logistical problems. The current geographic distribution of coal and oil production is illustrated in maps IBRD 15627R2 and 15628R2 (located at the end of Volume II). Technology 1.09 Oil production has decelerated in recent years, in part because of the out-of-date technology used and the modest rate of discovery. Use of equipment and techniques considered out of date in many other countries is also apparent in the coal and electricity subsectors; while this may increase costs, it does not appear to hold back production as much as in the oil industry. 1.10 In some areas, however, China has developed a technological lead. One is the extraction of oil from shale, for which a simple and effective technique is in use on a significant scale. Another is biogas, which has been developed on a scale unparalleled elsewhere - some 7 million digestors, each capable of meeting the cooking and lighting needs of a household of 5 people, were reported to have been built by 1979. Yet another may be small-scale hydroelectric power plants, which in rural areas have the advantages of faster construction, low demands on trained manpower, and modest transmission costs; some 90,000 (with an average capacity of about 80 kW) are estimated to be in operation, and the numbers and capacity are being rapidly expanded. Institutions 1.11 Fragmentation of responsibilities may impede the development and implementation of coherent policies in the sector. The institutions primarily concerned with commercial energy are the Ministries of Coal Industry, Petroleum Industry and Electric Power, and the Energy Commission recently created to coordinate their activities./l Except for this new commission, /1 Energy ministries have been alternately consolidated and fragmented throughout the last 30 years. Coal and petroleum were under the same ministry as recently as 1975. The most recent changes have been the separation of the Ministry of Chemical Industry from that of Petroleum Industry (1978), and of Water Conservancy from that of Electric Power (1979), and the creation of the Energy Commission (1980). - 193 - their activities are generally confined to energy supply. Allocation and pricing of energy are the responsibilities of state and lower level economic commissions, materials distribution bureaus, and pricing bureaus. 1.12 The respective roles of the central ministries vis-a-vis provincial and local authorities vary among the three principal subsectors. Petroleum is the most centralized, with all onshore oil and gas fields controlled from Beijing by the Ministry of Petroleum Industry. By contrast, roughly 40% of coal is produced by small mines controlled at or below the provincial level, and even large mines report both to the Ministry of Coal Industry and the provincial government. For electric power, five regional grids come under the direct supervision of the Ministry of Electric Power, while other systems are under the dual control of the provincial government and the Ministry. 1.13 Other ministries also play important roles in the sector. The Ministry of Railways handles about two thirds of the coal and most of the refined petroleum production; conversely, coal and oil together account for over 40% of the total tonnage carried by rail. Large volumes of coal and oil are also moved via coastal and inland waterways by ships operated by the Ministry of Communications. The Ministry of Chemical Industry operates a number of refineries, which produce a considerable volume of fuels as well as petrochemical feedstocks. The Ministry of Water Conservancy has a role in water management and, thus, hydro development. The Ministry of Geology is active in the surveying of mineral resources, and some of its activities seem to overlap or compete with those of the Ministries of Coal and Petroleum Industry. While the three energy producing ministries manufacture much of their own equipment, some equipment is also bought from the Ministries of Machine Building or imported via the Ministry of Foreign Trade, which also handles oil and coal exports. Investment Planning 1.14 The investment planning system and project design and evaluation criteria used in the energy sector appear to vary somewhat among ministries and provinces. The task of obtaining information on planning procedures and criteria was further complicated by the present process of reform, which has so far affected some aspects more than others. The description below attempts to summarize the situation in 1980, but may be oversimplified; further changes are likely as economic reforms are instituted. 1.15 The main focus of investment planning in the coal and oil industries is the annual plan. Some longer term plans, covering 5-10 year periods, are used in formulating the annual plans and others are being prepared, but they seem to be the exception. The basic administrative unit in the planning system is the bureau or administration responsible for an individual coal mine or oil field or, in some cases, for a group of mines or fields located near one another and managed as a unit. Proposals for projects are prepared at this level and, if they exceed a specified size, submitted to a higher authority (provincial coal bureau or the Ministry of Petroleum Industry) in - 194 - the fall of the year preceding proposed implementation. A geological report and preliminary project design would generally (in the case of coal) or sometimes (in the case of petroleum) have been approved earlier, so processing of the annual plan is concerned primarily with allocations of budgetary resources and key construction materials. 1.16 In the electric power industry, five-year plans are in general use. They cover individual grids and are developed by the respective regional and provincial power bureaus. Major projects are subject to approval by the Ministry of Electric Power and the State Planning Commission (SPC). The process is a two-stage one, with an initial approval required for detailed design work and a second approval required to implement a project. Project selection is based on "payback" periods rather than present worth analysis. Also, the concept of the least-cost sequence of projects for developing the entire system over a period of time is not applied. 1.17 The function of "balancing" resource availability against project proposals is carried out within the three energy supply industries by the respective ministries, and across sectors by the State Planning and Capital Construction Commissions./1 Only a few months (in some cases, a few weeks) are allowed for this process, and as the Energy Bureau of the SPC has only about 30 professional staff, it seems unlikely that detailed analysis can be made of a large number of alternatives. 1.18 With such a planning system, problems are likely to arise from the limited time horizon, the few alternatives considered, and the limited geographic and jurisdictional scope of most planning work. Focusing attention primarily on annual planning can produce two kinds of problems. First, it may result in use of short-term expedients, such as neglect of tunnelling and other development work in coal mines and excessively rapid depletion of oil reserves. This appears to have happened to a certain extent. Second, in investment programs, the preoccupation with current output may lead to a focus on current investment levels, but little concern about channeling investment into projects that will yield benefits earlier rather than later. This seems to be reflected in long construction periods and in the very long production lives planned for many mines. 1.19 The isolation of planning within ministries, the limited number of alternative studies and the short time allowed central authorities to deter- mine the best combination of investment projects must often result in failure to study adequately solutions to problems that cross the lines of geograph- ical or ministerial jurisdictions. The creation of the Energy Commission can be expected to improve this situation in some respects, e.g. coordination of coal and electric power planning. Other closely related sectors, such as railways and chemical industries, however, do not come under this commission, and analytical methods that link sectoral plans across jurisdictional lines do not seem to be in general use. It would, of course, be useful to link /1 The Energy Commission will presumably become an intermediate step. - 195 - railway planning with the planning for coal and for highways, and to link chemical industry planning with petroleum and agricultural planning, but without putting all these sectors under the same commission. Shadow prices, i.e. estimates of the value to the economy of key commodities such as capital, foreign exchange, and fuel that are used to provide a consistent basis for planning in all sectors (but not in financial accounting), could be used to provide the needed intersectoral links in planning. 1.20 The choices among projects and of technical design and operating standards for projects would also seem to offer scope for raising outputs and lowering costs. The mission visited, for example, a number of installations with what appeared to be an excessive amount of underutilized and stand-by equipment. Improving performance in this area may require less fundamental changes than those required to implement comprehensive sector planning. Aspects of project selection and design that may merit attention include: (a) generation of an inventory of investigated projects and project design alternatives that is sufficiently large to allow selection of the most economically attractive alternatives; (b) the computation of economic indices (such as net present value, benefit-cost ratio, or internal rate of return) that can assist in the allocation of scarce resources to their most productive use; (c) comparison of costs and benefits under a variety of project design alternatives and equipment types; and (d) the balance made by project designers between operating reliability and return per unit of invested resources. Pricing 1.21 Despite recent (1979) rises in natural gas and coal prices to non- household users (25% for gas, 29% for coal), the prices of several forms of energy - including fuel oil, coal, crude oil and industrial electricity - are at the official exchange rate still well below international prices (Table 1.5). Equally important, the current relative prices of different forms of energy are inappropriate - for example, encouraging the use of heavy oil rather than coal for fuel. However, prices of a few energy produces - gasoline, kerosene and electricity for household lighting - are now above international trade prices. - 196 - Table 1.5: PRICE COMPARISONS Average Price in inter- Unit Chinese price national trade Coal (7,000 kcal/kg) $/ton 19-33/a 41/a Crude oil $/ton 90 250 Gasoline, 70 oct. $/ton 533 310/b Kerosene $/ton 453 360/b Diesel fuel $/ton 280 3207 Heavy fuel oil $/ton 37 220 Electricity (/kWh 4.3 5.2/c Average household lighting c/kWh 10-13 5.2/c Average heavy industry /kWh 4.0 5.2/c /a The Chinese price is ex-mine, while the international price is f.o.b. Australia. /b Retail prices in many countries are much higher than this due primarily to excise taxes. /c Estimated cost of electricity from large, coal-fired plants with 1980 investment and fuel costs. Tariffs in many countries are considerably lower than this. Note: Average prices were only available for the principal petroleum products and for electricity; from indirect indications, crude oil is priced at Y 135/ton and coal at Y 35/ton (raw, equivalent to Y 49/ton of standard coal, at the mine mouth). Chinese prices were converted at Y 1.5 = $1.0. Sources: Ministries of Petroleum Industry and Electric Power, and mission estimates. 1.22 The extent to which these prices affect the level or composition of energy supply and demand is not clear, however, as fuels and electricity are distributed through a system of administrative allocation. The general use of low-octane gasoline rather than diesel in trucks apparently reflects the availability of these fuels and of trucks with the two types of engines rather than the relative fuel prices. Similarly, the substantial use of crude oil as a fuel goes against a price disadvantage of more than 2:1 in favor of fuel oil. Nor is the low rate of refinery utilization (about 82%) directly explainable by the oil price structure; in spite of the low fuel - 197 - oil price, refining operations appear highly profitable (Y 1.0 of crude oil is refined into about Y 2.6 of products)./1 1.23 The setting of prices appears to be separated from annual economic plan management or investment planning. While no explicit statement of price-setting principles was given, the history and structure of prices indicate that price stability is given a high priority; that the accounting cost of domestic production is given greater weight in price setting than the opportunity cost in overseas markets; that wide profit margins are built into prices of products for use outside of the industrial sector, while this is less true for the intermediate products consumed primarily by industry; and that some effort is made to achieve geographic uniformity of prices. 1.24 Energy pricing appears to be used in China primarily to generate and distribute revenues rather than to influence supply and demand. Data are not directly available on the value of energy producton and conversion in current prices, but in 1970 prices, gross output in 1979 was as follows:/2 Production: Coal Y 11.6 bln Oil & gas 2.8 Hydroelectricity 3.2 Subtotal 24.6 Conversion: Oil refining 15.2 Thermal elec. generation 14.5 Subtotal 29.7 Based on the prices shown on Table 1.5, revenues from coal, oil and gas would now be considerably higher, while those from electricity would be slightly lower than this, for an overall total in the order of Y 60 billion. Little is known about the distribution of these revenues. The sector's annual wage bill appears to fall somewhat short of Y 5 billion. Investment from the state capital construction budget averaged about Y 11 billion p.a. in 1978 and 1979. Some fraction of the remainder pays for material current inputs to operations, but the bulk is presumably remitted as taxes and profits to the provincial and national governments. /1 There may be an indirect link, however; the profitability of refineries may have prompted the construction of much capacity in locations where it cannot now be used because of transport bottlenecks. Alternatively, the Ministry of Foreign Trade may prefer exporting crude oil, which is much cheaper internally than externally, though it also exports gasoline and middle distillates, which it buys at prices well above their export values. /2 Based on Annex D, Table 1.4, with electricity divided in proportion to 1979 production (17.8% hydro and 82.2% thermal). - 198 - Energy Consumption in Relation to GNP 1.25 China's per capita consumption of commercial energy is about 3-1/2 times the average of other low-income developing countries, one third short of the middle-income average, or 25-30% above the average of all developing countries. This level of consumption of commercial energy is very high in relation to economic activity: about 2.5 times as much per unit of GNP as the average for other developing countries (Table 1.6) or for industrialized market economies, and about 1-1/2 times the average for other centrally planned economies. Table 1.6: ENERGY INTENSITY OF MAJOR DEVELOPING COUNTRY ECONOMIES, 1978 (Kgce commercial energy consumption per $ GNP) China (1979)/a ........................................ 2.5 Bangladesh ............................................ .5 Ethiopia .............................................. 0.2 Burma ................................................. 0.5 Viet Nam .............................................. 0.7 India ................................................. 1.1 Pakistan .............................................. 0.9 Indonesia ............................................. 1.2 All low-income countries b........................... (1.0) Egypt ................................................. 1.4 Thailand .............................................. 0.8 Philippines ........................................... 0.7 Nigeria ............................................... 0.2 Korea, Rep. of ........................................ 1.3 Turkey ................................................ 0.7 Mexico ................................................ 1.1 Brazil ................................................ 0.6 Spain ................................................. 0.8 All middle-income countries ib ....................... (0.9) All developing countries except China b.............. (1.0) /a Based on 1979 estimates of 621 Mtce, $260/capita and 965 million people at mid-year; 1978 ratio was probably slightly higher. /b Country groups as defined in World Bank, WDR, 1980. Note: The countries listed have a population of 30 million or more. The listing of countries other than China is in ascending order by estimated GNP per capita. Sources: Energy consumption data from World Bank, Economic Analysis and Projections Department Data Base. Population and per capita GNP data from World Bank, World Economic and Social Indicators, October 1980. - 199 - 1.26 Our present knowledge allows only a tentative analysis of the appar- ently very high rate of energy consumption to GNP. The low share of liquid fuels and electricity and the high share of coal may force consumers to use coal-fired technologies, which often have a low energy efficiency. It may be noted, for instance, that the energy-intensive East European economies also rely heavily on coal. The example of India, however, which approaches China in dependence on coal (60% of consumption, as compared with China's 72%), suggests that this is not an important part of the explanation, inasmuch as India's energy consumption is about 1.0 kgce per $ of GNP (1979), while China's is about 2.5 kgce/$ (or 2.2 kgce/$ if coal used in households is excluded to adjust for the generally harsher climate). China's per capita consumption of motor fuels and electricity combined is almost double that of Indonesia or India,/l so the Chinese economy does not seem to be short of premium energy forms relative to other countries at its income level. 1.27 Since industry (particularly heavy industry) is generally more energy intensive than other sectors, part of the reason for China's higher energy consumption is probably the higher shares of industry in total output and of heavy industry (which accounts for four fifths of all industrial elec- tricity consumption) in industrial output. But when allowance is made for the unusual internal price structure in China, the share of industry in GDP, though about 10 percentage points above the average for other low-income countries, is probably close to the average for middle-income countries. A comparison with India shows that while China's industrial sector is about roughly three to four times larger (in tons of steel, basic chemicals and cement, as well as in its contribution to GDP),/2 it consumes about six times as much energy. Similarly, China's energy-to-GDP ratio is well above that of middle-income countries with large heavy industry sectors such as the Republic of Korea (1.1 kgce/$ in 1979) and Turkey (0.6 kgce/$), despite lower urbanization and less energy-intensive agriculture. 1.28 Thus, the macroeconomic data (buttressed by a variety of microecon- omic evidence) suggest that China uses energy - especially in industry - a good deal less efficiently than other developing countries. One underlying reason has been inadequate access to foreign equipment (and know-how), which embodies the substantial progress made in fuel-saving techniques over the past three or four decades. More important, however, has been the lack of incen- tives to economize on energy: as with other materials, enterprise managers until very recently have had little reason to limit the energy use of their equipment, or to demand new and more fuel-efficient models from their sup- pliers - who in turn have been under little pressure to undertake appropriate /1 Comparison refers to combined consumption of motor diesel, gasoline, and electricity, with electricity counted at 270 g/kWh. /2 See Annex D, Tables 1.5 and 1.6. - 200 - research and innovations. This situation is now changing; and major energy savings were recorded in 1979 and 1980./i Prospects 1.29 Official projections are not available for most of the variables involved in estimating future energy production-consumption balances. How- ever, the information available indicates that China may well be a net importer of oil by 1990, and that slow-growing energy supplies will be the most serious constraint on China's growth rate in the 1980s. This situation (discussed in its broader context in Chapter 6 of the Main Report) can be better understood with the help of quantitative estimates designed to indicate the magnitude of the potential problem and its sensitivity to alternative policies and conditions. In the paragraphs that follow, four alternative cases or sets of assumptions are presented, one for each of the possible com- binations of two alternative sets of estimates of economic growth rates and of coefficients measuring the effectiveness of energy conservation efforts. At least one of these cases implies coal and oil imports at levels beyond the capacity of the ports and other infrastructure involved and total imports at unaffordable levels. While not plausible as predictions, these cases none- theless illustrate that certain combinations of planning targets, which may be reasonable taken individually, may be unworkable. More generally, the scen- arios help to show the potential contribution of energy saving to China-s growth and trade prospects in the 1980s. 1.30 Depending on the scenario chosen, the balance of trade in energy deteriorates from net exports valued at about $4.7 billion in 1980 to, in the best case from the point of view of minimizing energy consumption, exports of about $4 billion in 1985 and $2.3 billion in 1990 (in 1980 dollars). Two other cases have net imports of $3.7-4.7 billion in 1990, while the worst case has net imports already in 1985 and impossible import levels in 1990./2 Table 1.7 summarizes the results of the four cases in terms of the 1985 and 1990 energy trade balance, while Table 1.8 shows much of the detail. The assump- tions and methodology used are described below. 1.31 The prospect of a deterioration in the energy trade balance is largely the result of declining oil production and continued growth of demand. The oil production level of 104-106 million tons p.a. reached in 1978 and maintained through 1979 and 1980 appears to represent at least a temporary peak. In the projections, production is assumed to drop to 100 million tons by 1985 and 95 million tons in 1990. The latter level, especially, is very uncertain (paras. 3.12-3.15). /1 See Annex D, para. 3.13. /2 Figures are in 1980 dollars, but with prices adjusted for expected real price increases. - 201 - Table 1.7: ALTERNATIVE ESTIMATES OF 1985 AND 1990 OIL AND COAL BALANCES Moderate growth scenarios Faster growth scenarios Mod. savings High savings Mod. savings High savings 1985 1990 1985 1990 1985 1990 1985 1990 Quantity (million tons) Coal 20/a 16 20/a 40/a (21) (108)/b 20/a 19 Oil 1.3 (16.9) 11.3 1.1 (3.8) (32.1)/b 6.5 (13.9) Value ($ billion)/c Coal 0.8 0.8 0.8 1.9 (0.8) (5.1)/b 0.8 0.9 Oil 0.4 (5.5) 3.2 0.4 (1.1) (10.5) 1.8 (4.6) Total 1.2 (4.7) 4.0 2.3 (1.9) (15.6) 2.6 (3.7) * Negative balances in parentheses. /a Assumed to be constrained by port facilities. /b Believed to be infeasible due to foreign exchange and transport bottlenecks. /c Average "real" prices in 1980 dollars assumed to be: $280/ton and $328/ton for oil, and $40/ton and $47/ton for coal, in 1985 and 1990, respectively. Sources: Table 1.8 and staff estimates. - 202 - Table 1.8: CONSTRUCTION OF 1985 AND 1990 OIL AND COAL BALANCE ESTIMATES Base Moderate growth scenarios Faster growth scenarios year Moderate savings High savings Moderate savings High savings 1980 1985 1990 1985 1990 1985 1990 1985 1990 oil Balance (mln tons) Power generation 16.5 12.5 8.5 10.5 4.5 12.5 8.5 10.5 4.5 Other heavy industry 27.5 27.7 32.3 24.5 26.9 29.5 36.0 26.2 30.9 Light industry 8.0 10.7 14.3 10.1 12.7 11.2 16.4 10.6 14.7 Transportation 14.0 19.5 28.0 19.2 26.8 21.2 34.2 20.8 33.1 Agriculture and construction 15.0 18.5 22.6 18.3 22.0 19.1 24.4 18.9 23.6 Interfuel substitution outside power 0.0 0.0 -4.0 -2.0 -6.0 0.0 -4.0 -2.0 -6.0 Refining losses 8.0 9.8 10.2 8.1 7.0 10.3 11.6 8.5 8.1 Total consumption 89.0 98.7 111.9 88.7 93.9 103.8 127.1 93.5 108.9 Production 106.0 100.0 95.0 100.0 95.0 100.0 95.0 100.0 95.0 Net exports (imports) 17.0 1.3 (16.9) 11.3 1.1 (3.8) (32.1)/a 6.5 (13.9) Coal Balance (mln tons) Power generation 117 157 220 154 209 171 256 162 233 Other heavy industry 305 307 358 272 299 327 408 290 342 Light industry 65 87 116 82 104 91 133 86 119 Transportation 25 29 33 28 32 29 36 29 35 Household and commercial 107 124 146 117 122 130 164 123 137 Interfuel substitution outside power 0 3/b 11/b 7/b 15/b 3/b 11/b 7/b 15/b Total consumption 619/c 707 884 660 781 750 1,008 697 881 Production 606 727/d 900 680/d 821/d 730 900 717/d 900 Net exports (imports) 6 20/d 16 20/d 40/d (20) (108)/a 20/d 19 Electricity Consumption (bln kWh) Electric power system 45.0 53.4 67.2 50.0 59.4 56.2 75.5 51.6 64.4 Other heavy industry 160.0 181.0 231.0 174.7 213.3 194.7 266.8 184.3 238.9 Light industry 48.0 73.1 105.2 69.3 95.1 77.3 124.5 72.8 110.4 Agriculture 27.0 34.7 45.8 33.9 43.6 36.1 49.7 35.1 47.0 Services and households 20.6 26.2 35.0 25.2 32.2 26.9 37.9 25.7 34.3 Total consumption 300.6 368.4 484.2 353.1 443.6 391.2/e 554.4 369.5 495.0 Hydro production 58.2 75.0 104.0 75.0 93.9 75.0 115.8 75.0 106.4 Natural Gas Production/Consumption (bln cu m) 14.3 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 Overall Balance (Mtce) Primary energy production 640.9 712.6 841.0 677.5 779.6 714.8 846.1 705.5 842.2 Consumption 615.4 696.4 854.3 646.7 750.3 735.3 970.0 681.7 848.8 Net exports (imports) 25.5/c 16.2 (13.3) 30.8 29.3 (20.5) (123.9)/a 23.8 (6.6) /a Believed infeasible due to constraints on foreign exchange and transport facilities. /b Includes 3 million tons as replacement for natural gas. /c Assumed to include 5 million tons (2.9 Mtce) taken from stocks. /d Assumed to be constrained by available port facilities. /e Probably infeasible due to constraints on electrical generation, transmission, and distribution facilities. - 203 - 1.32 The energy demand projections are derived from estimates of the growth rates of the principal energy-consuming sectors of the economy and coefficients representing energy consumption per unit of output in each sector. In some cases, different coefficients are applied to "base" levels of output (equal to 1980 levels) and to incremental output in the 1980-85 and 1985-90 periods. In the two industrial sectors (heavy and light), the same coefficients are applied to oil and coal consumption; interfuel (coal for oil) substitution is estimated separately. Estimates of electric power system fuel consumption and refining losses are derived after estimating final demand for electricity and refined petroleum products. 1.33 The selection of "sectors" among which total demand is divided varies somewhat according to the energy form. Thus transportation is treated as a separate sector for estimating coal and oil demand, but not for electricity demand./l 1.34 The two sets of economic growth projections are labelled "moderate" and "faster." Under the moderate growth scenarios, GDP grows at 4% p.a. from 1980 to 1985 and 5% p.a. from 1985 to 1990. GDP growth under the faster growth scenarios is 5% in 1980-85 and 6% in 1965-90. Growth rates over the two five-year periods by sector are shown in the following page. /1 The sectoral division used is as follows: Oil demand Coal demand Electricity demand Heavy industry /a Heavy industry /a Heavy industry /a Light industry Light industry Light industry Transportation Transportation Agriculture Agriculture and Household and commercial Services and households construction Power generation Power system use and Power generation losses Refining losses /a Exclusive of electricity generation and (in oil) petroleum refining. The 1980 energy balances, compared to those for 1979 on Table 1.1, trans- fer some of the agricultural demand for electricity to industrial or household uses. Guesswork is used for other changes from 1979 to 1980. The results are merely intended to illustrate the orders of magnitude involved. - 204 - Moderate growth Faster growth 1980-85 1985-90 1980-85 1985-90 Growth rates (% p.a.) -------- Heavy industry 2.5 5.0 4.0 6.5 Light industry 7.0 6.0 8.0 8.0 Agriculture 3.0 3.0 3.5 3.5 Services and other 4.5 5.5 5.0 6.5 Total GDP /a 4.0 5.0 5.0 6.0 /a Rounded to nearest 0.5. 1.35 In most sectors the underlying demand (adjusting for efficiency improvements) is assumed to grow at the same rate as the corresponding component of GDP. In some sectors, however, different growth rates are used. Thus, the underlying demand for oil in agriculture and construction is assumed to grow at 1.5 times the annual rate of agricultural output. The underlying demands for oil and coal in transportation are assumed to grow at 1.8 and 0.7 times the GDP growth rate, respectively. These coefficients represent increased mechanization and use of irrigation in agriculture and increasing use of trucks and diesel railway locomotives. The underlying demand for coal for household and commercial use is assumed to grow at the same rate as GDP. (However, the electricity demand of the services and household sector is assumed to grow at the same rate as the "services and other" component of GDP.) Where they differ from sectoral growth rates, these derived growth rates are as follows: Slow growth Faster growth 1980-85 1985-90 1980-85 1985-90 ------ Growth rates (% p.a.) -------- Oil/agriculture and construction 4.50 4.50 5.25 5.25 Oil/transportation 7.20 9.00 9.00 10.80 Coal/transportation 2.80 3.50 3.50 4.20 Coal/household and commercial 4.00 5.00 5.00 6.00 - 205 - 1.36 Conservation of oil and coal in the final demand sectors (refinery and power system requirements are handled separately) is reflected in coefficients relating demand for each fuel per unit of output in each sector to "base" (1980 level) output and to the increments added to annual output over the 1980-85 and 1985-90 periods. The coefficients assumed for unit fuel consumption on "base" output reflect improvements in existing plant and the shifting of production from less efficient to more efficient plants and are as follows: Moderate savings High savings 1985 1990 1985 1990 Heavy industry 0.90 0.85 0.80 0.70 Light industry 0.95 0.95 0.90 0.85 Household and commercial 0.95 0.90 0.90 0.75 Others 1.00 1.00 1.00 1.00 1.37 The coefficients for unit fuel consumption on incremental output are generally lower (i.e. energy savings are greater at the margin), reflecting the assumption that greater efficiency can be more easily achieved by introd- ucing new equipment (or expanding output from selected existing equipment) than by upgrading the energy efficiency of existing equipment. In light industry and in the household and commercial sector, however, the coefficients shown above for base year output are also applied in 1985 and 1990 to all out- put, including increments between 1980 and 1985. In other cases, the amount of energy use associated with the 1980-85 increment in output remains the same in 1990 and in 1985. The coefficients used are as follows: Moderate savings High savings 1980-85 1985-90 1980-85 1985-90 Heavy industry 0.80 0.70 0.70 0.60 Transportation 0.95 0.90 0.90 0.80 Agriculture and construction 0.95 0.90 0.90 0.80 1.38 In electric power demand, the assumptions used imply few major savings possibilities, except in power transmission and possibly in other heavy industry (where metallurgy and chemicals are the principal users). Elsewhere, modernization of China's economy is expected to result in gradually higher ratios of electricity consumption per unit of output, - 206 - despite efforts to economize. This is consistent with 1977-79 experience. The coefficient of electricity usage per unit of "base" output is 1.00 in all sectors.1 The coefficients on incremental output are as follows: Moderate savings High savings 1980-85 1985-90 1980-85 1985-90 Power system losses 0.9 0.8 0.6 0.7 Heavy industry 1.0 1.0 0.7 0.8 Light industry 1.3 1.3 1.1 1.1 Agriculture 1.8 2.0 1.6 1.8 Services and households 1.1 1.1 0.9 0.9 1.39 Interfuel substitution outside of the power sector is accounted for separately./2 In all scenarios, and in both 1985 and 1990, we assume that 3 million tons of coal will be needed to make up for a decline in production of natural gas. Additional coal will be used to substitute for oil; we assume the amounts involved (in millions of tons p.a.) are as follows: Oil consumption Coal consumption Scenario 1985 1990 1985 1990 Moderate savings 0 -4 0 +6 High savings -2 -6 +4 +12 /1 However, once the 1985 demand for electricity has been computed for each sector and scenario, these figures become the new base for computing demand in 1990. To illustrate this method of calculation, if a sector uses 200 units of electricity in 1980, its output grows by 50% in 1980-85, and its incremental coefficient is 1.2, its incremental output in 1980-85 will require 120 units of electricity (50% of 200 = 100 x 1.2); thus it will require a total of 320 units in 1985. If its output then grows by another 50% from 1985-90 while its incremental coefficient rises to 1.5, its demand for electricity will grow by 240 units (50% of 320 = 160 x 1.5), to 560 units in 1990. The growth of demand in the power system, used in computing incremental power system losses, is calculated based on electricity demand growth in the other (user) sectors combined. /2 See para. 1.41 regarding substitution in the power sector. - 207 - 1.40 tnergy consumption in the final demand sectors, computed according to the assumptions discussed above, is used for projecting consumption in the energy transformation industries, oil refining and electric power. Oil refining losses are estimated as a fraction of the final demand for oil after refining. In the moderate energy savings scenario, the figures used are 11% in 1985 and 10% in 1990. In the high savings scenarios, they are 10% in 1985 and 8% in 1990. By comparison, the equivalent ratio for oil actually refined in 1979 is assumed (Table 3.1) to have been about 11.8%./1 1.41 In estimating fuel consumption in electric power production, it is assumed that the use of oil-fired plants will be reduced, as follows: Base Moderate savings High savings 1980 1985 1990 1985 1990 Net change (mln tons) n.a. -4.0 -8.0 -6.0 -12.0 Oil used (mln tons) 16.5 12.5 8.5 10.5 4.5 Electricity produced (Twh) 57.0 43.1 29.3 36.2 15.6 1.42 Hydroelectric power is assumed to supply 25% of incremental demand for electricity in each five-year period after 1980, except that an upper limit of 75 Twh (billion kWh) is assumed for hydroelectric capacity that can be built by 1985; i.e., a 16.8 Twh increase from 1980-85. 1.43 In all scenarios, all other incremental demand for electricity after 1985, both to substitute for oil and to supplement hydro output, is assumed to be met by additional use of coal, with 0.62 tons of coal required for each Twh. This represents roughly a 10% energy saving at the margin, compared to the 1979 ratio of about 0.68-0.69 tons required per Twh. 1.44 As an alternative method of presentation, Table 1.9 summarizes the energy savings and switching assumptions applying to coal and oil. Here the energy conservation effects in most sectors are expressed as percentage savings compared to base year ratios of energy consumption. /1 The actual ratio of refining losses to consumption in 1979 is estimated (Tables 1.1 and 3.1) at about 10%; but the projected rates imply improve- ments in refining efficiency, because in 1980 China burned a great deal of unrefined crude oil. Note also that the projected demand for oil in sectors that consume primarily light products (transportation, agricul- ture, and construction) is rising faster than the demand for heavy fuel oil, implying a need for more cracking and refining per ton in the future. - 208 - Table 1.9: SUMMARY TABLE OF ENERGY SAVING AND SWITCHING ASSUMPTIONS FOR OIL AND COAL IN THE MODERATE AND HIGH ENERGY SAVINGS SCENARIOS /a Moderate savings High savings scenarios scenario 1985 1990 1985 1990 Base year power generation switched from oil to coal (million tons) 4 8 6 12 Other fuel use switched from oil to coal (million tons, net of switches to feedstock use) 0 4 2 6 Energy savings on 1980 base output in heavy industry 10% 15% 20% 30% Energy savings on incremental output in heavy industry /b 20% 30% 30% 40% Energy savings on base and incremental output in light industry 5% 5% 10% 15% Energy savings (in coal) on base and incremental household and commer- cial demand /c 5% 10% 10% 25% Energy savings on incremental demand in transportation, agriculture and construction Id 5% 10% 10% 20% Refining loss as a percentage of oil consumption after refining 11% 10% 10% 8% /a Not shown is the requirement for coal in power generation, which is assumed in all cases to be 0.62 million tons of coal for each billion kWh of added power based on coal. /b Percentage reductions compared to 1980 ratios of energy use per unit of output, applied to the increment of the last five years. As an example, in projecting energy demand in heavy industry in 1990, in the moderate savings case, the ratio needed to produce the base amount is reduced by 15%, the ratio to produce the 1980-85 increment is reduced by 20% (with no further reduction after 1985), and the ratio to produce the 1985-90 increment is reduced by 30%, compared to the base ratio. Ic This demand is assumed to grow at the same rate as GDP. Id Incremental demand projected as in heavy industry but with no reductions in the requirement to produce the 1980 base output. Demand for oil in transportation is assumed to grow at 1.8 times the rate (in % p.a.) of GDP growth (so that 5% GDP growth requires 9% transport growth using oil); demand for oil in agriculture and construction is assumed to grow at 1.5 times the rate (in % p.a.) of agricultural growth; demand for coal in transportation is assumed to grow at 0.7 times the rate (in % p.a.) of GDP growth. - 209 - 1.45 In the four scenarios considered (Table 1.8), the total consumption of energy, including natural gas and hydroelectricity, would rise from the 1980 level of 615 Mtce to between 677 and 735 Mtce in 1985. One scenario (moderate savings combined with faster growth) would require a physically unattainable 970 Mtce in 1990, implying net imports of 124 Mtce; while requirements in 1990 in the other scenarios would range from 750 to 853 Mtce. 1.46 The stringency of the conservation effort required to satisfy demand levels of the high savings cases is apparent from the implied growth rates of energy demand, compared to growth of GDP (Table 1.10). For the decade as a whole, energy consumption would grow at rates 2.2% to 2.4% p.a. less than GDP, and energy use per unit of final output would be required to fall by about 20% (i.e. at an average rate of 2.2% to 2.3% p.a.). Even larger reductions would be required in the use of oil per unit of final output - by about 30% over the decade (at rates averaging 3.4% to 3.8% p.a.). Thus the share of oil in total energy consumption would be reduced from 21.1% in 1980 to roughly 18.5% in 1990. 1.47 These numbers, though only illustrative, indicate that providing the energy needed to sustain even a 4-5% p.a. economic growth rate over the coming decade will require a coordinated program of investments involving energy consumers and transportation infrastructure, as well as energy produc- tion./1 Oil production prospects, especially at Daqing, the largest field, can be improved by investment in reservoir engineering and the equipment and training needed to implement it effectively. Investment in coal and electri- city generation, as well as in related transportation and transmission facili- ties, will need to be accelerated if energy is to be available in the quanti- ties and forms needed as alternatives to oil. Energy consumption in general and oil consumption in particular need to be restrained. To obtain the required level of conservation in the time required, control through the central allocation of investment resources and fuels may need to be supplemen- ted by adjusting the incentives facing provincial, local, and enterprise officials and workers. /1 How to do this is discussed in detail in Annex D, paras. 5.05-5.14, and in Chapter 6 of the Main Report. - 210 - Table 1.10: LEVELS OF CONSERVATION IMPLIED IN DEMAND PROJECTIONS Moderate Faster growth growth scenarios scenarios Moderate High Moderate High savings savings savings savings Energy consumption (Mtce) 1980 615.4 615.4 615.4 615.4 1985 696.4 646.7 735.3 681.7 1990 854.3 750.3 970.0 848.8 Growth rate of energy 1980-85 2.5 1.0 3.6 2.1 consumption (% p.a.) 1985-90 4.2 3.0 5.7 4.5 1980-90 3.3 2.0 4.7 3.3 Difference between GDP 1980-85 1.5 3.0 1.3 2.8 and energy consumption 1985-90 0.6 1.8 0.3 1.5 growth rates (% p.a.)/a 1980-90 1.1 2.4 0.8 2.2 Elasticity with respect 1980-85 0.63 0.25 0.73 0.43 to GDP /a 1985-90 0.88 0.63 0.95 0.75 1980-90 0.75 0.45 0.85 0.60 Energy savings (%)/a,/b 1985 7.0 13.6 5.9 13.2 1990 9.8 20.7 7.7 19.3 Average savings (%) p.a. 1980-90 1.0 2.3 0.8 2.2 Energy savings in oil 1985 8.8 21.3 8.6 17.7 (%)/a,/b 1990 18.3 31.4 16.4 28.4 Average savings (%) p.a. 1980-90 2.0 3.8 1.8 3.4 Oil as proportion of 1980 21.1 21.1 21.1 21.1 total energy 1985 20.7 20.0 20.6 20.0 consumption (%) 1990 19.1 18.3 19.1 18.7 /a To avoid biasing these ratios, the precise weighted growth rates of GDP are used here in place of the rates rounded to the nearest 0.5; thus in the moderate growth case the rates per annum are 4.0% for 1980-85, 4.8% for 1985-90 and 4.4% for 1980-90, while in the faster growth case they are 4.9% for 1980-85, 6.0% for 1985-90, and 5.5% for 1980-90. /b Percentage by which projected energy consumption is below the level that would be reached if it grew at the same rate as GDP from 1980 base. Sources: Table 1.8 and assumptions explained in text and Table 1.9. - 211 - 2. COAL Introduction 2.01 Coal is China's largest indigenous energy resource and at present meets nearly 70% of demand for commercial energy. In view of the very large quantity of proven reserves relative to those of oil and gas, coal can be expected to remain the dominant fuel in the foreseeable future./1 Coal reserves in China are comparable in quantity and grade to those of the USA and USSR. The known resource base is adequate to meet the present consumption rate for around 1,000 years, and since exploration of the remoter deposits is still proceeding, the total of proven reserves is likely to increase still further. Table 2.1 shows proven reserves by geographical region. Table 2.1: RECOVERABLE RESERVES OF COAL (billions of tons) Regions Coal and Lignite Northeast 20.0 North 411.3 East 41.8 Central-South 23.7 Northwest 77.1 Southwest 68.6 Total 642.5 Source: Ministry of Coal Industry. 2.02 Although substantial coal deposits occur in all regions, the north has by far the largest proportion. In general, the coal deposits in southern China are of a lower grade than those in the north, but some attempt is now being made to exploit these lower grade reserves for power generation at the mine site and to reduce the strain on the transport system. Organization 2.03 All coal reserves in China are the property of the state, but res- ponsibility for their development is divided between the central government, represented by the Ministry of Coal Industry and the provinces. In general, /1 Reserve estimates appear to be based on extensive drilling and geophysical surveying, so a high proportion can be regarded as "proven." - 212 - the larger mines are operated by the Ministry, and the smaller ones by pro- vincial, county and commune authorities. The same division of responsibility applies to the allocation of coal. The Ministry of Coal Industry is also responsible for many other functions: for instance it runs several educa- tional facilities offering specialized training for graduate-level students and workers. It also operates research institutes and facilities for manufacturing mining equipment (although some equipment is also manufactured by the Ministry of Machine Building). The Ministry of Coal Industry has a number of separate departments responsible for, inter alia, labor, finance, mechanization, local mining (provincial mines), mine safety and transportation/sales (the latter department allocates coal from the centrally controlled mines). 2.04 On a geographical basis, the Ministry has 84 coal mining bureaus responsible to it, 11 of which produce 10 million tons of coal a year or more. Districts apparently report through the local provincial government. Each district has a mine bureau and each province its own coal administration bureau. The separation of centrally organized mines and the smaller mines operated by provinces, administrative areas, counties and communes seems to be fairly complete at the working level, since the latter rely on the provincial coal administration bureaus for materials allocation, technical assistance, and other matters. Local mines seem to be less well equipped and less well organized than the centrally managed mines, and their workers are more poorly paid. Their productivity and the quality of coal produced also appear to be lower. Employment Conditions 2.05 Miners' pay in state-owned mines seems to be about Y 100 per month, including allowances, with miners working on mechanized mine faces paid 20% more than ordinary miners. The general level of pay is set by the Ministry, but the provincial bureaus have some discretionary power to adjust the rate for local conditions. Pay systems vary, with some mines paying on a straight monthly basis, others on a straight tonnage basis, and others using a combina- tion of salary and bonuses. There is some evidence that determining pay sys- tems and rates is a sensitive issue on which ideological and practical consid- erations have had to be balanced. Mine workers are paid considerably more than agricultural laborers, and they have far better housing and benefits, so recruitment is not a major problem (although some labor bureaus have found that unemployed urban youth do not want jobs as miners). Production 2.06 Coal production increased from 90 million tons in 1955 to 635 mil- lion tons in 1979, before falling to 620 million tons in 1980 (Table 2.2). The reason for the drop in production between 1979 and 1980 appears to be that in previous years production was expanded at the expense of tunnelling and other development work needed to sustain production. The Government has stated that coal production will drop again in 1981. The Government nevertheless expects to increase production to over 700 million tons by 1985. - 213 - Table 2.2: COAL PRODUCTION, 1955-80 (million tons) Lignite Anthracite Bituminous /a Total 1955 2.1 13.6 74.0 89.7 1960 8.5 68.2 318.3 397.2 1965 8.8 39.6 183.4 231.8 1970 13.0 56.1 284.9 354.0 1975 20.3 97.1 364.8 482.2 1976 20.6 99.6 363.3 483.5 1977 23.3 115.5 411.9 550.7 1978 24.9 126.2 466.8 617.9 1979 25.3 125.8 484.4 635.5 1980 24.3. 128.9 466.9 620.1 /a Includes coking coal. In 1979 this amounted to 327.4 million tons, much of it used as fuel. Note: Statistics on coal production must be treated with considerable caution, since the coal appears to be measured by filling railway coal cars and river barges to a given level, not by weighing it. The quantities of coal produced by county and commune mines are probably subject to even greater errors, and some production may not be recorded. Sources: Appendix Tables A.6, A.7 and A.8. 2.07 About 95% of coal production comes from underground mines, most of which are only partly mechanized. The few large underground mines equipped with coal cutting machinery provide about a third of deep-mined coal and partly mechanized mines another third. The number of underground coal mines in operation is shown in Table 2.3. - 214 - Table 2.3: UNDERGROUND COAL MINES IN OPERATION, 1976-79 Large mines Medium mines Small mines over 600,000 t/y 100,000-600,000 t/y Less than 100,000 t/y Production Production Production Number (million t/y) Number (million t/y) Number (million t/y) 1976 187 149 988 205 944/a 114 1977 203 174 1,015 228 999/a 134 1978 201 203 1,141 256 9217a 142 1979 213 213 1,040 255 1,0077a 151 /a These figures are inconsistent with reports that 20,000 county and commune mines produce 25-40% of total output. The 1,007 small mines may refer only to those under the control of the Ministry of Coal Industry, but the production shown for small mines must include that for the small mines controlled at the county and commune levels. Source: Ministry of Coal Industry. 2.08 Future plans call for increased mechanization of working faces in both old and new mines, with the former having priority, and for domestic manufacture of underground mining equipment. For mechanized mines, longwall mining is preferred to the room and pillar system because it achieves a higher recovery of coal. The resulting surface subsidence is not regarded as a problem, although it prevents mining under inhabited areas and major civil works. Underground mining equipment has been purchased from the Federal Republic of Germany, the UK, Poland and Japan. However, the equipment has been introduced with mixed success, partly due to inadequate training of the operators and maintenance staff. 2.09 There are long lead times to open new underground mines, generally 5-10 years depending on the size of the mine. Part of this time is required for project approvals, but construction of new shafts and tunnelling for haulage ways and underground development are extremely time consuming due to a lack of modern equipment. These are critical areas for the expansion of future coal production. 2.10 Open-pit mines produce only a small proportion of the coal (12% and 2.4%, respectively, for bituminous coal and lignite in 1979) because geological conditions often lead to high stripping ratios and because the equipment is very small by modern standards. For example, the Chinese use 8-ton dump trucks whereas 85-ton trucks are used in India and trucks as large as 175 tons are used in the USA./1 The use of such small equipment /l Major open-pit mines such as that at Fushun use railways, however. - 215 - greatly reduces the economic efficiency of the present Chinese open-pit operations. The Coal Ministry places high priority on developing open-pit mines and wishes to import modern, large-scale dump trucks, power shovels of 30-40 ton capacity, and draglines. Owing to the hardness of the overburden, bucket wheels are not usually suitable. 2.11 Since open-pit mines can generally be developed more quickly and usually have lower unit investment and operating costs than underground mines, the development of open-pit mining is a matter of highest priority for the industry. Joint ventures with the Ministry of Electric Power would permit the development of mine-mouth power plant complexes. Coal Quality 2.12 The quality of coal delivered to the consumer is generally poor. The power sector reports an average calorific value of only 4,480 kcal/kg. Analyses of raw coal (which appear to represent the better grades) are shown in Table 2.4. Table 2.4: RAW COAL ANALYSES Shandong Province Liaoning Province Nantun Mine Xinglongzhuang Santaizi Mine No. 3 seam field Ash content % 21.6 9.87 9.41 Volatiles % 43.5 33.1 32-49 Calorific value kcal/kg 5353 6821 7060 Sulphur 1.99 0.49 0.5 Phosphorus 0.038 n.a. n.a. Moisture % 10 6.3 2.89 Source: Liaoning and Yanzhou Coal Bureaus. 2.13 Most coal could be improved by washing. Only about 100 million tons are washed at present, but it is planned to double coal washing capacity by 1985 and the purchase of needed equipment has high priority. Washeries produce three grades of coal: large lump (50%), middlings (20%) and fines (15%), with dirt and losses accounting for the remaining 15%. Where geolo- gical conditions are complex, washing produces a disproportionately high percentage of fines, which are difficult to dewater. It is planned to uti- lize middlings and fines as fuel in power plants at the mine mouth, and also to improve the quality of fines and make them suitable for industrial use by flotation processes. At present, lump coal is reserved for coking, - 216 - middlings for power generation, and fines for domestic use (including the manual production of compressed coal balls). 2.14 Coal mines purchase power from coal-fired thermal plants run by the Ministry of Electric Power. At present, energy is wasted as the coal is transported, often over long distances, from the mine to the plant and the power sent back to the mine. It seems that, in future, more power plants will be constructed (as joint ventures between the Ministry of Coal Industry and the Ministry of Electric Power) at the mouth of open-pit mines and underground mining complexes with coal washeries. Transportation /1 2.15 Coal is transported principally by rail. The 413 million tons year transported in 1979 accounted for 38% of total rail freight; an additional 220 million tons/year are moved by inland waterways and coastal shipping. Coal ports handled 82 million tons of coastal shipments and exports last year. Transport bottlenecks have occurred in the past but are reported to have eased, possibly as a result of the decline in coal production, but also as a result of double-tracking and electrification of parts of the railroad system, which is nevertheless still reported to be running at capacity in many seg- ments. While in some cases the Ministry of Coal Industry builds rail spurs to coal mines and owns coal cars, in general the Ministry of Railways takes delivery of the coal, and assumes responsibility for it, at the mine. Trans- portation is at present the principal bottleneck to expanding coal production in several provinces, including Shanxi, Shaanxi, Ningxia, Guizhou and others. Table 2.5: COAL CONSUMPTION BY SECTOR, 1976-78 (%) 1976 1977 1978 Power 16.6 17.5 20.1 Railways 4.9 4.8 4.7 Metallurgical 9.3 9.7 10.5 Other industries 50.2 49.3 48.9 Household and commercial 19.0 18.7 17.8 Source: Ministry of Coal Industry. /1 For greater detail, See Annex F, "The Transport Sector." - 217 - Consumption 2.16 In the consumption of coal, industrial demand is dominant, espe- cially as industry also consumes roughly four-fifths of electrical power. The metallurgical sector comprised only 10.5% of coal consumption in 1978, but this does not include coke ovens (classified under chemicals) which consumed about 10% according to one source./1 Industrial and power sectors must use large quantities of coking grade coal for thermal purposes; coking grade coals reportedly account for 51% of total coal produced. Export Prospects 2.17 Exports of coal have been rising rapidly from a small base, and reached 4.63 million tons in 1979. A further rise is expected to perhaps 20 million tons in 1985. Given the enormous resource base and the acceptable quality of the better grades of Chinese coal, exports could continue to rise thereafter. However, there are problems to be overcome: (a) increasing mine output to meet expanding domestic demand while also conserving energy to free coal for export; (b) improving the capacity of the railroads that link mines with ports; and (c) improving the number and capacity of coal loading ports (both loading rate and size of vessels). At present only two specialized ports can load coal in northern China, Lianyungang and Qinhuangdao; the capacity of the latter is being increased from 10 to 40 million tons/year by 1985. A new coal port is being built at Shijiusuo to handle 15 million tons/year by 1985, with an ultimate capacity of 30 million tons; a 240 km double-track electrified railway is being constructed to bring coal to the port. Increasing exports are also anticipated though general cargo ports such as Qingdao and Dalian. Not only northern ports but also southern ones such as Huangpu could be usefully improved, along with transport links to the interior, to handle coal for export. Productivity 2.18 Comparisons with other countries are difficult, because in China each coal mining enterprise provides a range of social services that in other countries are provided by the Government. Thus, many persons whose activities have no direct relation to coal mining are included in the mine work force. Employment in the coal industry is shown in Table 2.6. /1 R.P. Greene and J.M. Gallagher, editors, World Coal Study, Vol. I, Future Coal Prospects, Cambridge, Massachusetts: Ballinger, 1980, p. 100, based on data for 1977 allegedly supplied by the Ministry of Coal Industry. - 218 - Table 2.6: COAL INDUSTRY EMPLOYMENT, 1975-79 ('000) 1975 1976 1977 1978 1979 Total employed 3,626 3,814 3,939 4,068 4,104 Miners in centrally controlled mines 836.7 859.2 924.0 921.1 929.8 Of which: Underground 809.6 833.7 897.4 895.1 903.6 Open-pit 27.1 25.5 26.6 26.0 26.2 Source: Ministry of Coal Industry. 2.19 The data indicate an average production of about 0.5 tons per man-day in underground mines and about 2.0 tons per man-day in open-pit mines. The small number of modern open-pit mines and the overall low degree of mechanization in underground mines result in lower productivity than is common in industrialized Western countries. Mechanized underground mines planned for the northeast would have capacities of 1.2 and 1.8 million tons/ year; their output would be 1.6 tons per man-shift, compared with 2 tons in India, an average 3-4 tons/per man-day in Western European underground mines and 10.75 tons in the USA. Even greater output, of the order of 10-20 tons/per man-day, could be obtained from modern open-pit mines with large-scale equipment. Prospects and Recommendations 2.20 Any estimates of future coal production must be treated with cau- tion. The mission was told that "more than 700" million tons would be pro- duced in 1985./i Even if high priority is given to the coal industry in response to the recent change in expectations of oil output, total coal production is not likely to exceed 750 million tons by 1985; taking transport problems into account, production of around 730 million tons seems more likely. Such an increase in production would come from the development of a number of major new projects (Table 2.7) and from various small projects. This increase appears achievable based on past performance, since the production data for 1965-80 indicate an increase of about 125 million tons of production capacity every 5 years for the past 15 years. /1 Other visitors have reportedly been told that 1985 production would be 720 or (more recently) 730 million tons. - 219 - 2.21 However, judging by the limited information available, this expan- sion will not be easy. Data on major new projects (Table 2.7) show an approx- imate increase in capacity of 50-60 million tons/year by 1987. But much of this production will come onstream after 1985 and some allowance must be made for slippage in construction schedules. Several of the identified projects are joint ventures with foreign companies, while others involve contractual arrangements, whereby the import and installation of foreign equipment is paid for by coal exports. Negotiation of these projects is proving difficult. Furthermore, any major expansion of open-pit coal mining will depend on satis- factory arrangements being concluded for the procurement, operation and main- tenance of foreign equipment, since large-scale equipment is not manufactured domestically. In the next decade at least, most new production capacity is expected to be from underground mines, which require several years to con- struct. Thus, much will depend on the success of continuing efforts, such as are now being made, to modernize and transform the tehnology of medium-sized and small-mines so as to prolong and expand their output. 2.22 The potential for expanding coal output up to 1990 will be con- strained both by the possibilities for opening up new mines and by the difficulties of expanding transportation on the scale required. Since the mid-1960s, China has increased its coal output by 120-130 million tons every five years, and a similar increase seems entirely possible during 1980-85. By extension, output might be expected to rise further to about 870 million tons in 1990; a strenuous effort to accelerate the pace of mine develop- ment, coupled with heavier investment, could possibly raise the level to 900 million tons or a little more. However, coal production on this scale would encounter transport difficulties requiring substantial further invest- ments in railroad facilities. Making effective use in 1990 of a 280 million ton increase in coal output might well require, in addition, construction on a large scale of mine-mouth thermal power plants, together with long- distance transmission lines, and a major investment in coal washing and processing facilities, which would reduce bulk before transporting and so economize on transport requirements. Improvements now projected in inland waterways - particularly the Huai He, Grand Canal, and Xi Jiang - will also ease the coal transport problem. Capital Requirements 2.23 A final area of importance for coal production prospects is finan- cing. No information was available on the industry's financial position, its sources of funds or its future capital expenditure plans. Capital require- ments for the coal industry in China are difficult to assess since investment costs and expansion plans are not known. However, they are undoubtedly very large, on the order of Y 10 billion more for 1981-84. Investment during the past five years is shown in Table 2.8. Investment in 1981 is expected to be roughly the same as in 1980, about Y 2.5 billion. - 220 - Table 2.7: MAJOR COAL MINE PROJECTS Mining Province administration Project Nei Monggol Huolinhe Open-pit lignite mine under construc- tion. Planned output 3-5 million tons/year by 1985. Hebei Kailuan Following rehabilitation of earthquake damage, two new mines are under con- struction - Qianjiaying and Donghuantuo - with capacities of 4 million tons/year each. Shandong Yanzhou Mines producing steam coal for export under construction - production 8-10 mil- lion tons/year by 1987. Anhui Huainan & Huaibei Increase production of coal to supply Shanghai with 20-30 million tons/year by 1987. Five to six new mines with out- puts of 1.5-2.0 million tons/year each are being developed. Shanxi Datong Open-pit mine to be constructed at Shuoxian to produce 10-15 million tons/ year by 1987. Henan Pingdingshan Increase production of coking coal from 10 to 13 million tons/year by 1987. Jiangsu Xuzhou Increase production of bituminous coal from 13 to 15 million tons/year by 1987. Source: Ministry of Coal Industry. - 221 - Table 2.8: INVESTMENT IN THE COAL INDUSTRY, 1976-80 (Y million) 1976 1977 1978 1979 1980 (est.) 1,866 2,166 3,138 3,248 2,447 Source: Appendix Table A.12. 2.24 Foreign exchange will be required to purchase mining equipment and to develop a Chinese capability to manufacture a wider range of modern types of equipment. There are now over 100 large plants making machinery for the coal industry,and they have growing capabilities. But along with open-pit mining equipment, there is still a need to import coal washing equipment and various other items, notably in the area of precision hydraulic equipment. 3. PETROLEUM Sector Development 3.01 Until the establishment of the People's Republic in 1949, the scale of oil exploration and discoveries had been modest, with production of only 70,000 tons p.a., plus 50,000 tons of shale oil. Extensive exploration was then undertaken with help from the USSR, but with only limited success and that in the remote northwest. The discovery in 1959 of the Daqing field, which was to become one of the world's major oilfields, shifted exploration to the northeast, north and east and led to the discovery of the Shengli, Dagang, Liaohe, Nanyang and Renqiu fields, and of offshore findings in the Bo Hai. 3.02 By 1979, production had reached 106 million tons of crude oil and 14.5 billion m3 of natural gas, an outstanding and promising perform- ance, particularly as it was achieved with China's own equipment. Production has, however, been essentially static for 2-1/2 years and is now declining slightly. Organization 3.03 All exploration and production activities specifically concerned with oil and natural gas are the responsibility of the Ministry of Petroleum Industry in Beijing. The Ministry of Geology also carries out exploration work. Once production has been established, the Ministry of Petroleum - 222 - Industry organizes a production unit responsible for all petroleum activities, including exploration, in its area (this area corresponds to geological boundaries rather than to the regular administrative units). A separate unit is responsible for offshore operations. 3.04 Oil fields are made as self-sufficient as possible, with the excep- tion of electric power generation. In addition to their normal functions, petroleum units manage agricultural production, schools, nurseries, hospitals, municipalities, and commercial activities catering to their employees. This explains in part the very high number of personnel employed in petroleum activities. Exploration 3.05 Exploration is done by about 300 seismic crews and 500 drilling rigs (total staff about 100,000), which annually drill 2,000-3,000 wells, compared with a total of 395 for all oil-importing developing countries in 1978./1 Exploration activities are spread over an area of sedimentary formations with oil-bearing potential, totalling 4.2 million km2 on land (about one third of the country) and over 1 million km2 offshore. There is some evidence that the considerable amount of modern equipment recently purchased is not being effectively used. 3.06 The last major discovery was the Renqiu area in 1975. Although it appears that Chinese practice is to report as a new "discovery" the finding of production in an area remote from existing production (rather than reporting each individual oilfield as a discovery), the rate of discoveries seems very low in relation to the area explored and to the number of exploratory wells. Indonesia, for example, which is comparable to China in terms of sedimentary areas and current oil production level, finished 133 exploratory wells in 1979, of which 34 produced oil and 9 natural gas. 3.07 Offshore exploration is still at an early stage, and despite periodic reports of "significant" discoveries, oil production does not appear to be imminent from any of them, especially since large-scale development is likely to require the expertise of foreign oil companies. Agreements have been signed with French and Japanese groups for offshore development in the Bo Hai, but the geology of the region makes it unlikely that production can do more than offset the decline of production from older onshore fields. Pro- posals for further exploration work are being sought from international oil companies that have participated in seismic surveys of the continental shelf off the southeastearn and southern regions of China. Major offshore produc- tion is unlikely before 1985 or, possibly, 1990. /1 Differing definitions of "exploration" drilling may bias this comparison. - 223 - 3.08 Onshore, according to Chinese estimates, only about 13% of the potential oil-bearing wells have been well explored and over 60% have hardly been explored at all; while almost no drilling has been done anywhere to depths of over 3,000 meters. Promising sedimentary areas still have to be explored, particularly in the northwest. Though prospects for large discov- eries exist here, their development would entail severe logistical problems, in particular transportation over very long distances to consuming areas. The prospect is therefore for further discoveries of relatively small oil- fields close to the existing producing areas, which might tend to offset the decline of production from existing fields. 3.09 Over the long term, China will need to raise the productivity of the exploration effort through improved technology, personnel deployment and training if it is to reverse the present production decline. Production 3.10 After peaking in 1979 at 106.1 million tons - including 300,000 tons of shale oil - production has started to decline. Almost 90% of production is concentrated in the north, the east and particularly the northeast, where the Daqing field supplies about half of China's oil (Table 3.1). - 224 - Table 3.1: CRUDE OIL PRODUCTION BY REGION AND MAJOR FIELDS, 1977-80 (million tons) 1977 1978 1979 1980 Northeast 54.875 56.039 57.363 58.59 Daqing 50.314 50.375 50.753 51.50 Liaohe & others 4.561 5.664 6.610 7.09 North 15.554 20.399 20.404 19.11 Renqiu 12.298 17.230 17.331 16.03 Dagang 3.150 3.000 2.901 2.91 Others 0.106 0.169 0.172 0.17 East 17.660 19.743 19.206 17.92 Shengli 17.520 19.468 18.880 17.59 Others 0.140 0.275 0.326 0.33 Central-South 1.261 2.832 3.385 4.16 Northwest 4.207 4.942 5.687 6.06 Southwest 0.081 0.094 0.104 0.10 Total 93.638 104.049 106.149 105.94 Sources: Ministry of Petroleum Industry. 3.11 Daqing is located in a geological unit known as the Songliao Basin, which lies mainly in Heilongjiang, and produces over 50 million tons of crude oil annually. Other fields in the basin produce about 1 million tons of crude oil annually. The Daqing field measures some 140 km in a north-south direc- tion and 20-40 km in an east-west direction. From information on the histori- cal development of the field and its geological characteristics, the original oil in place in the reservoir can be estimated at around 3,000 million tons, of which about 30% or 900 million tons is likely to be recovered by the existing production techniques. Of this amount, some 515 million tons appear to have been recovered between 1960 when production began and the end of 1979. Crude oil production from the field has apparently peaked and is beginning to decline. 3.12 The production method used at Daqing throughout its 20-year produc- tion history has involved injecting water into the oil reservoirs in order to flush oil towards the producing wells. The injection pattern is apparently based on a Soviet model; it gives a neat and orderly spacing of wells at the surface, but a very poor geometrical distribution of wells among the individ- ual oil reservoirs. This system yields relatively high production rates in - 225 - the early years of development, but results in a lowered ultimate total recovery of oil and a relatively rapid production decline as injected water breaks through the oil and reaches the production wells. This point has been reached at Daqing, where daily oil production per well is declining while the quantity of water injected is increasing very rapidly. Since there is a physical limit to the total amount of fluid that can be handled by the wells and surface facilities, the future prospect is for ever-increasing recovery of water combined with declining oil production. Output from existing wells in the field is expected to fall in the 1980s by 2-3 million tons on the average each year, but officials suggest that this will be partially offset by drilling new wells and tapping new layer around those now in production. 3.13 The production decline rate at Daqing is likely to be the key factor in any forecast of oil production in China during the next ten years. In the other producing areas, which consist of groups of smaller oilfields, new dis- coveries will tend to offset the decline of production of fields developed earlier. The overall decline in production in the next five years from these grouped fields (such as Liaohe, Dagang, and Shengli) is therefore likely to be much less marked than at Daqing. These fields are grouped around the Bo Hai, and the extension of the producing areas offshore will also tend to offset production declines in the older onshore fields. None of the anticipated new pool developments, however, seems important enough to offset the likely decline in production from Daqing in the next five years. 3.14 Earlier expectations of future production levels from the continen- tal shelf seem to be overoptimistic in the light of the results of the geophysical surveys made in the last two years. Much of the northern conti- nental shelf and the Bo Hai appears to be underlain by a continuation of the onshore geology, so that production characteristics of any oilfields are likely to resemble those of the existing onshore fields. Production from all of these existing fields has been based on extensive use of water to flood the oil reservoirs; this would be an extremely expensive operation offshore, with corresponding long lead times for installation of production facilities. The geology of the southern part of the continental shelf appears to be more like a conventional oil producing area, and reports of oil discoveries in the Xi Jiang estuary and off Hainan Island are encouraging. Nevertheless, these discoveries will have to be confirmed by appraisal wells before production platforms can be designed and installed. It is therefore unlikely that offshore oil production can commence before 1985, and offshore production on a scale sufficient to materially affect the overall petroleum situation is unlikely much before 1990. 3.15 A tentative forecast is for China's oil production to fall to 100 million tons in 1985; indeed, production is being cut back toward that level in 1981 and at the same time efforts being made to adjust methods to get better long-run results. Trends in the second half of the 1980s are more uncertain, since they depend on the magnitude of new discoveries and the speed - 226 - with which they can be developed. Output in 1990 is likely to amount to 80-105 million tons, but on balance, even if improved techniques are applied and some new fields begin to be developed, a further small decline seems likely, perhaps to 95 million tons. Quality of Crude Oil 3.16 A large part of Chinese crude oil has a high wax content, a low proportion of light fractions, and a melting point so high that it is a solid at ambient temperatures most of the year in most of China. These characteristics lead to severe problems in transportation and refining, as described later. Equipment and Methods 3.17 Most of the drilling equipment is manufactured in China and based on outdated models from the USSR. The quality is lower in the oldest fields like Daqing and better in the new fields like Renqiu and offshore fields, where imported equipment is used. The two drilling rigs visited by the mission were poorly maintained and dangerous. Stationary equipment such as pump stations and tanks was much better maintained. No information was obtained on the rate of accidents but it is likely to be high, with no blow out preventers on drilling sites, little use of protective clothing, breached dikes around tanks, lack of efficient fire extinguishers, open electric knife switches in pump houses, etc. 3.18 Drilling methods and production technology are also backward, although they too are better in the new fields. Work overs on wells, rendered difficult by the type of equipment used, seem to be infrequent. Many wells are not producing, for example, up to 20% of those at Shengli. Poor cementa- tion of well casing prevents proper control of oil production and water injec- tion in many wells. In Daqing, the pattern of water flooding used results in much recoverable oil being left in the reservoir, but the more recently developed Shengli and Renqiu fields use more efficient patterns of water injection. The measurement of oil, water and gas is imprecise, particularly for individual wells, which has serious implications for field and reservoir management. There seems to be poor training of field personnel and a lack of supervision by qualified staff, due to a shortage of trained personnel and a lack of transport for supervisors to make frequent visits to scattered work locations. With these constraints it is doubtful whether advanced methods of enhanced recovery can be effectively implemented. The productivity of the work teams and their equipment appears to be low; at Daqing, for example, 20 teams drill 50 exploratory wells per year at an average depth of 2,000 m. The total depth per team is one eighth to one fifth of what trained crews using modern equipment could achieve. In Daqing, Shengli and Renqiu, the excess capacity of capital equipment such as pumps and machine tools was evident and must have added significantly to the investment costs for these oilfields. - 227 - 3.19 In the last five years, China has imported a considerable amount of modern oilfield equipment, particularly seismic survey and drilling equipment, but it appears that much of this is not yet being effectively used in the field. The greater part of this equipment seems to have been purchased in 1978, when investment for petroleum exploration is reported to have more than doubled (to $1.4 billion) from the previous year. Among the items imported at this time are land seismic survey equipment from the USA, heavy onshore drilling equipment from the USA and Romania, seismic data processing centers and an offshore seismic survey vessel from France, and offshore drilling equipment from Singapore, Japan and Norway. Field staff seem to have been inadequately trained to use this equipment, however. (This situation is clearly described in reports concerning the loss of the Bo Hai II offshore drilling rig.) Consumption 3.20 Table 3.2 shows the estimated balances of the principal categories of oil for 1979. - 228 - Table 3.2: OIL BALANCES, 1979 (million tons) Diesel Fuel oil Gasoline Kerosene oil & crude Other Total Primary production n.a. n.a. n.a. 106 n.a. 106 Refining Input n.a. n.a. n.a. -76 n.a. -76 Output 11 4 19 28 6 68 Net 11 4 19 -48 6 -8 Exports 2 .. 2 13 .. 17 Net domestic availability 9 4 17 45 6 80 Consumption 9 4 17 45 6 81 Electric power system .. .. 17 .. 17 Heavy industry .. 1 23 3 27 Light industry .. .. 1 5 2 8 Transportation 7 ) .. 7 14 Agriculture & other 2 ) 3 8 .. 1 14 Domestic & commercial .. 1 .. .. .. 1 Notes: Distribution of refined product exports and consumption is conjectural. The figures shown for total consumption by sector are consistent with the percentage breakdown obtained from the Ministry of Petroleum Industry, assuming (a) "Agriculture and Other" accounts for otherwise unaccounted for consumption, and (b) refining losses are included in industrial consumption. Sources: Ministry of Petroleum Industry and mission estimates. Natural Gas 3.21 In 1980, the 14.27 billion m3 of natural gas produced was 1.7% below production in 1979; the mission estimates that production will further decline, perhaps to as little as 12.0 billion m3 in 1985. Production is almost equally divided between nonassociated gas, produced mainly in Sichuan, and associated gas dissolved in the oil and produced with it. Associated gas is now almost fully utilized as fuel in the oil fields or as feedstock for fertilizer and petrochemical plants. Total natural gas consumption in 1979 is estimated at 4.1 billion m3 (28%) for fertilizers, 1.3 billion m3 (9%) for petrochemicals and synthetic fibers, and 9.1 billion m3 (63%) for fuel, of which 1.7 billion m3 (12%) were used in thermal power plants. The regional - 229 - breakdown of gas production is shown in Table 3.3. Many of the fertilizer and petrochemical plants are located near old oilfields and thus depend on associated gas obtained from declining production of oil. The supply of gas may therefore fall below requirements in the near future, which would make the development of nonassociated gas supplies in the oil producing areas an urgent priority. To do this would require deeper drilling and improved equipment. Table 3.3: NATURAL GAS PRODUCTION (billion m3) 1977 1978 1979 1980 Northeast 4.62 5.00 5.17 5.27 Daqing 3.00 3.20 3.31 3.39 Others 1.62 1.80 1.86 1.88 North 0.78 0.82 0.93 0.80 Renqiu - - - Dagang 0.78 0.82 0.93 0.80 Others - - - East 1.18 1.44 1.55 1.44 Shengli 1.2 1.4 1.5 1.42 Others - - - 0.02 Central-South 0.02 0.02 0.02 0.05 Northwest 0.26 0.30 0.33 0.39 Southwest 5.26 6.15 6.52 6.33 Total 12.12 13.73 14.52 14.27 Note: The table was compiled from two sets of data, one rounded to tens of millions of m3 and the other to hundreds of millions of m3. Source: Ministry of Petroleum Industry. Oil and Gas Reserves 3.22 The extent of oil and gas reserves is not widely publicized inside China and is a matter for considerable speculation outside the country. Even in the oil fields visited - which accounted for 80% of petroleum production - the data available did not permit the calculation of a reliable estimate. Table 3.4 shows tentative estimates of oil and gas reserves based on available information. - 230 - Table 3.4: TENTATIVE ESTIMATES OF OIL AND NATURAL GAS RESERVES Original Remaining recover- Oil recoverable Asso- Non- Total able produced reserves ciated assoc. natural Region oil to date of oil gas gas gas ----------(million tons) ----- ---(billion m3 Northeast 1320 590 730 25.0 .. 25.0 North 460 80 380 5.0 .. 5.0 East 410 161 249 10.0 3.5 13.5 Central- 90 10 80 2.5 .. 2.5 south Northwest 400 40 360 15.0 .. 15.0 Southwest 13 1 12 0.5 70.0 70.5 Total 2693 882 1811 58.0 73.5 131.5 Source: Mission estimates. Pipelines and Refineries 3.23 Pipelines and some refineries are under the control of the Ministry of Petroleum Industry. Refineries combined with petrochemical plants come under the Ministry of Chemical Industry. 3.24 Eighty percent of crude oil production is moved by pipeline and the remainder by rail, which also carries most of the refined products, or a total of 80-90 million tons per year. The 6,800 km network of oil pipelines is not extensive in relation to China's size and the distribution of produc- tion and markets. The high pour point of most of the crude oil, fuel oil and the heaviest grades of diesel fuel complicates their transport, and all pipelines, railroad tank wagons and oil tankers must have heating equipment. - 231 - 3.25 Refinery capacity is about 93 million tons p.a., with a throughput of perhaps 76 million tons in 1980. There are 46 refineries, most of which are small by international standards. Only 31 have capacities of 500,000 tons p.a. or more, and even the largest refineries visited by the mission (at Daqing, Fushun, Shanghai, and Yanshan, about 40 km from Beijing) are not particularly large by world standards. Given the economies of scale in petroleum refining, many of the smaller refineries may be uneconomic. 3.26 Refineries produce a wide range of products, together with petro- chemical feedstocks and industrial solvents. The output of the principal products is shown in Table 3.5. Because of the low proportion of light fractions in the crude oil, secondary refining or cracking plants are required in most refineries. Table 3.5: OUTPUT OF PRINCIPAL REFINED PETROLEUM PRODUCTS ('000 tons per year) Product /a 1978 1979 % of total /b Gasoline 9,913.9 10,698.6 16.0 Kerosene 3,560.4 4,093.2 6.0 Diesel oil 18,256.6 18,728.2 27.0 Lubricating oil 1,806.2 1,914.8 3.0 Fuel oil 28,142.9 28,161.2 41.0 Benzene /c 340.3 322.9 0.5 Other /d n.a. n.a. 6.5 /a Product specifications are not available in all cases and some designa- tions may, in translation, vary from international usage. It appears, for example, that heavy marine diesel is classified as fuel oil. /b As reported by the Ministry of Petroleum Industry. /c May refer to industrial solvents. /d Includes LPG, wax, coke, aviation fuel, asphalt, petrochemical feed- stocks, greases. Source: Ministry of Petroleum Industry. 3.27 The quality of most products appears to be below international standards, with, for example, automotive gasoline octane ratings of only 66-70. No quality index is used for diesel fuel, which has a high pour point. Lubricating oils are of variable quality and complaints have been voiced by users. - 232 - 3.28 The refinery equipment seen was mostly produced in China, with the exception of specialized components such as wax purification and packing plant and major reactor vessels in some of the larger refineries. 3.29 The efficiency of refineries cannot be estimated with much accuracy since statistics do not distinguish between refinery fuel consumption and petrochemical feedstocks. In the refineries visited, the standard of cleanliness was high, but instrument maintenance was poor and fire fighting provisions insufficient. 3.30 Refineries, like other petroleum installations, are handicapped by the lack of domestic production of seamless steel pipes larger than 25 cm in diameter. Most pipelines and refinery pipework of larger diameter use spiral-weld pipe, which has a much lower pressure rating. Pipe elbows and swages in these larger diameters are not forged, but built up in segments from spiral-weld line pipe. Not only is the manufacture of this pipe labor- ious and time consuming, but the pipe also reduces the operating pressure and/or the safety factor of the installation. Oil Shale 3.31 Reserves of oil shale in China are reported unofficially to be of the order of 400 billion tons and may be much larger, since the geological environment is favorable for their formation in many of the sedimentary basins. Deposits of 100 billion tons or more, containing 5-10 billion tons of oil, are reported in Heilongjiang and Hebei. The grade of most oil shales is fairly low (less than 10%) but a few deposits have 10-20% of oil by weight. 3.32 Before 1958, shale oil accounted for almost half of Chinese oil production, but the proportion declined rapidly as normal crude oil produc- tion increased after the discovery of the Daqing oilfield. Recent produc- tion figures are shown in Table 3.6 for two producing fields at Fushun (Liaoning) and Maoming (Guangdong). 3.33 At the Fushun plant (visited by the mission) raw shale comes from the Fushun open-pit coal mine, where it overlays the coal. The rate of shale extraction is therefore geared to coal production. The shale oil plant has a capacity of 3 million tons/year of shale and produces 100,000 tons/year of heavy black viscous oil, which is burned as fuel oil. The oil content of the shale is about 6% by weight, but oil extraction is only about 3%. The technology, which is simple and works, should be applicable in other developing countries, after some upgrading to improve its efficiency. - 233 - Table 3.6: SHALE OIL PRODUCTION ('000 tons) 1970 1975 1977 1978 1979 Liaoning 385 363 238 262 233 Guangdong 122 151 114 101 81 Total 507 514 352 363 314 Source: Ministry of Petroleum Industry. 3.34 Although there appear to be no plans to expand the extraction of oil from shale, this development might be useful if conventional oil production continues to decline, since the reserve base is large and the plants can be built entirely with Chinese resources. There is apparently a cooperative project with Romania for direct burning of oil shale as fuel in a power plant. Recommendations 3.35 Despite great achievements since 1949, the petroleum sector has certain weaknesses that need to be remedied. 3.36 In exploration, improved technology and field practices, (particularly seismic surveying, well logging and drilling), together with equipment for deeper drilling, are essential to improve the discovery rate. 3.37 In production, fields have been made to produce too rapidly, which has led to quick declines after production peaks and to a reduction in the amount of oil ultimately recovered. Oil production peaked in 1979 and exist- ing fields now face a long period of decline, which cannot be offset by pro- duction from the few new fields being developed. Some increases can be expected from offshore developments but many of the earlier estimates seem exaggerated. Offshore development will depend on agreements with foreign oil companies, but even major discoveries in the near future would still require five to ten years to be developed. It is therefore unlikely that an overall decline can be arrested before 1985-90. Immediate steps should be taken to implement enhanced oil recovery programs and to improve reservoir engineering, particularly at Daqing. Drilling equipment and performance, and the cementing of well casings should also be improved. Specialized well logging tools are also needed to monitor the advance of water in the oil reservoirs. 3.38 While refineries represent a significant achievement in process engineering and manufacturing, they may require considerable investment in the - 234 - near future, if improvement of the quality of products becomes an important factor in programs to increase the efficiency with which petroleum is used. This is particularly important for automotive fuels and lubricants needed for a new generation of fuel-efficient trucks, automobiles and agricultural equipment. A program of vigorous energy conservation measures is also likely to have a high rate of return when it is evaluated in current international prices; this has proved true in refineries in various other countries, where programs are now underway. 3.39 In all sectors of the industry, better measuring techniques and instruments are needed and more attention should be paid to safety practices, if only to protect investments in equipment and training. The industry needs better and larger seamless steel pipe and fittings. Investment Requirements 3.40 Capital investments for the petroleum sector averaged about $1.8 billion annually in 1977-79 (Table 3.8). Capital requirements in the next decade should exceed $2 billion p.a., with 10-20% in foreign exchange. Table 3.7: INVESTMENT FOR EXPLORATION, DEVELOPMENT AND REFINERIES (Y million) Development Exploration Crude Gas Refinery Total 1977 967 479 30 493 1,969 1978 2,093 1,009 44 646 3,792 1979 1,286 888 80 470 2,724 Average for period 2,828 Source: Ministry of Petroleum Industry. 4. ELECTRICITY Sector Development 4.01 China's achievements in the field of electric power are indeed impressive. From 1,964 MW of generating capacity in 1952, the country had developed a capacity of 63,016 MW by the end of 1979 - an average growth rate of 13.7% p.a., which compares favorably with the rates in India (9% p.a.), Indonesia (8% p.a.) and all developing countries (10% p.a.). The total elec- tricity production increased even faster (14.7% p.a.) to 300.6 billion kWh in 1980. Electricity generation was 13 kWh per capita in 1952 and 308 kWh per capita in 1980. - 235 - 4.02 Almost all equipment needed for power generation, transmission and distribution is manufactured within the country; indeed substantial surplus capacity exists for the making of power generation equipment. Foreign technology and equipment are used only in exceptional cases, of which high tension transmission lines of 500 kV or over are the most important, although China has begun test-manufacturing its own 500 kV equipment. Technology for manufacturing, system planning, research and other areas has, however, lagged somewhat behind world standards./l 4.03 Electrification had reached a substantial proportion of the country in 1979, with 87% of communes and 63% of brigades having access to electri- city. Figures for electrification at the household level are not available, but are presumably much lower inasmuch as the per capita consumption of elec- tricity in the household and commercial sector is about equal to household consumption in Indonesia, where only 6% of the population have electricity in the home. Organization 4.04 The Ministry of Electric Power has overall responsibility for policy direction, plan coordination, and technical guidance in the sector. It has 15 departments and bureaus in Beijing. Also under its control are the 2 power construction administration offices, 8 scientific research institutes, 14 colleges and schools, 11 manufacturing and repair plants, 7 supplies departments, 1 construction company and 1 international engineering consultant company. Operation of the five principal regional grids is coordinated by regional electric power administrations responsible to the Ministry. The provincial grids and isolated installations, as well as transmission and distribution below 110 kV, are under the management of the provincial govern- ments with technical guidance from the Ministry. About 4.3% of the generating capacity is owned by Communes and brigades, and another 5.7% belongs to self-generating industries. Consumption Pattern 4.05 Industry consumed 79.0% of electricity net of power losses in 1979 and agriculture defined to include brigade industry - 15.8%. Residential, commercial and municipal consumption amounted to 4.8% and transportation to only 0.6%. A large part of the industrial consumption was accounted for by heavy industries (64% of the total). For comparison, industrial consumption in India was about 62% and in Indonesia about 39%. A range of 40-60% is more common in Asian developing countries such as Thailand, Malaysia, Korea and the Philippines. Transmission and distribution losses (energy sent out less energy sold) amounted to 9.24%, compared to about 13% in Indonesia, 10% in Thailand, 17% in Brazil and 7% in the Philippines. One reason for the rather /1 Recent contracts for designs and technical assistance from foreign firms will help to overcome these problems; for example, the big generation plants in Harbin and Shanghai have contracted with Westinghouse for assistance in producing international-quality thermal turbogenerators of 300 and 600 MW. - 236 - low losses in China is the large proportion of high voltage consumers and small volume of sales of electricity to the low voltage sector (domestic and commercial uses). Residential and commercial use per capita in 1979 amounted to less than 12 kWh/year - about the same as India's and Indonesia's consump- tion levels in domestic uses alone. System Description 4.06 The 63,000 MW capacity consisted in 1979 of a large number of systems but with three fourths of generation concentrated in 12 large grids, of which the 5 largest account for 47% of total capacity (Table 4.1). The many small power grids throughout the country lack the interconnections necessary to improve the efficiency of operations. Table 4.1: MAJOR ELECTRICAL GRIDS, 1979 Installed Peak Energy capacity demand generation Grids Area covered (MW) (MW) (GWh) Regional Grids Northeast China Liaoning and the major 7,759 6,020 42,350 part of Heilongjiang and Jilin East China Jiangsu, Anhui and 7,455 5,810 42,390 Zhejiang, and Shanghai municipality Central China Henan and Hubei 5,529 3,500 24,810 North China Beijing and Tianjin 4,989 3,553 25,890 municipalities and the northern part of Hebei Northwest China Shaanxi, Gansu and the 3,832 2,628 17,490 major part of Qinghai Subtotal 29,564 152,930 Seven large provincial grids 14,204 68,170 Total 43,768 221,100 % of national total 69.5% 78% Source: Ministry of Electric Power. - 237 - 4.07 Generally, the development of transmission and distribution has lagged behind that of generation. China has a shortage of about 10,000 km of transmission circuits of voltages above 110 kV. Similar shortages exist in substation capacity. These shortages limit the flexibility with which the available supply of electricity can be distributed among consumers. The transmission voltages in the country are 110 kV (62,000 km of lines), 220 kV (26,000 km) and 330 kV (801 km). Development of higher voltage lines is needed to permit significant power transfers over long distances. About 1,000 km of 500 kV transmission lines are under construction in central China and the northeast, while others in the north and the east are at the design stage. In the course of the 1980s, a high priority will be given to high transmission lines west to east, bringing power from energy-rich regions to industries near the coast. 4.08 A large part of the total generating capacity consists of small machines, which are inherently less efficient in power generation than larger units (unit sizes under 50 MW account for 47% and units of 50-100 MW another 20%). There are about 90,000 small hydro stations accounting for 7,000 MW, or 11% of total capacity; the average one thus had less than 80 kW of capacity. These scattered small units have proved to be very successful in serving rural needs, since they economize on transmission line costs. They are now being expanded by nearly 400 MW per year, while the average size has been trending upward. Thermal generating capacity was 69.7% (43,904 MW) of the total and accounted for 82.2% of the total production in 1979 and 80.6% in 1980. Coal- fired thermal capacity was 32,955 MW (52.3%) and produced 57.3% of the elec- trical energy in 1979; oil-fired thermal capacity was 10,762 MW (17.1%) and produced 19.7% of the energy, while natural gas-fired thermal units produced 1.9% of the energy. The hydroelectric capacity of 30.3% (19,110 MW) produced 17.8% of the electrical energy. The rise of over 16% in hydroelectric power output in 1980 over 1979, accounting for 43% of the increment in power output in the one year, lifted hydro's share to 19.4%. Though this result may have been helped by unusually high water levels in many reservoirs, it is also indicative of a determination to expand hydroelectric capacity rapidly in the 1980s, while giving increased emphasis to medium-sized units (50-500 MW) which can often be built in as little as 4-6 years. Fuel Consumption 4.09 The average fuel consumption rate for thermal power stations /1 was 2,954 kcal/kWh in 1979. The corresponding figures in 1977 and 1978 were 3,122 kcal/kWh and 3,038 kcal/kWh, respectively, which show a steady improve ment. This average fuel consumption rate compares favorably with 3,220 kcal kWh in Indonesia but is considerably higher than the 2,520 kcal/kWh in the USA. Substituting coal for oil in power generation and further improving /1 Excluding those smaller than 6 MW capacity, which accounted for 3.4% of the total electric energy supply. - 238 - conversion efficiency are important policy objectives in thermal power devel- opment because of the tight energy supply situation and the need to free oil for higher priority uses. Both objectives will involve substantial capital investments, particularly because small and old units must be replaced (further reductions in their fuel consumption are not possible), and boiler design limitations will allow conversion of only a fraction of the oil-fired thermal station capacity to coal. Capacity Utilization 4.10 The average running hours for all thermal units in the country was 6,018 hours in 1978 and 5,956 hours in 1979. The energy production from thermal units amounted to about 5,280 kWh/kW of installed capacity in 1979, and is said to have risen further to about 5,500 kWh/kW by 1980, which com- pares with about 3,900 kWh/kW in India and about the same in the USA. These figures show a high degree of maintainability and reliability of Chinese- designed machines in this size and indicate adequate operation and mainte- nance. Total capacity utilization, including hydro as well as thermal sta- tions, was 4,474 kWh/kW in 1979, the equivalent of over 12 hours per day of operation at full capacity. Demand Management 4.11 Despite considerable growth in generating capacity, the supply capa- bility has lagged behind demand and shortages exist, particularly in the northeast, north and east grids. It was not possible to obtain a precise assessment of the magnitude of the shortage and its effect on industrial pro- duction, but a figure of 20% loss in industrial production was quoted in three regions./1 The northwest grid and the province of Shanxi have not experienced power shortages. Demand management and allocation of shortages are apparently well organized with hardly any ad hoc load shedding and no blackouts. A remarkable performance in redirecting electricity supplies toward new priori- ties including exports appear to have made possible the swift rise in produc- tion of light industry (by 18.4% in 1980) and other sharp recent changes in the composition of industrial output. Several industrial plants visited with large exports were guaranteed electric power supplies. But like all rationing schemes, this system almost certainly results in some nonoptimal distribution and disguised costs. Spreading demand evenly over the hours of the day and days of the week requires work shifts to be staggered and production to be curtailed. These changes are associated with social and financial costs that need to be considered in expanding energy suppliers. Prospects and Recommendations 4.12 No official development program for the electricity industry is available, or expected to become available, until the next five-year plan /1 The extent to which these estimates take other constraints into account is not clear. - 239 - is prepared and released. A ten-year national development plan for power is being formulated by the Government and a draft is expected before the end of 1981. Quantitative information on future capacity is thus limited to works already underway. About 10,000 MW of hydroelectric and 12,000 MW of thermal generating capacity installations were in various stages of construction as of 1980; about 16,000 MW of this capacity could be expected to be commissioned by the end of 1985. In addition, about 400 MW of capacity is expected to be commissioned each year in the form of small hydroelectrical schemes, thus making a total capacity addition in the order of 18,000 MW by 1985. This is expected to be able to sustain a growth rate in electrical energy supply of 4-5% p.a. in the 1980-85 period. Because of the new emphasis on medium-sized hydroelectric projects and the high priority now being given to the sector in investment programs, this growth rate is expected to rise to 6-7% p.a. in the second half of the 1980s. 4.13 Long-Range Plans. The formulation of long-range (10-15 year) development plans for each region and for the country as a whole, including identification of the least cost sequence of projects for meeting expected demand, would represent an important advance. The present planning process does not use sophisticated economic analysis to compare alternative develop- ment strategies and select the least cost solution. Because of the large magnitude of investments envisaged, each percentage point reduction in the cost would amount to a saving far in excess of the cost of carrying out the analysis. We strongly recommend strengthening the planning agencies to perform this task and using external assistance in the initial period. 4.14 More emphasis needs to be given to planning interconnections between generating facilities within a province, between provinces to form regional grids, and between regional grids. Such interconnections would permit savings in capital investments (by reducing the reserve margins required and by permitting larger unit sizes and stations) and on fuel costs (by permitting efficient loading of thermal plants and optimum utilization of hydro capacity). Regional design and research institutes should pool their expertise and supplement it from outside, if necessary, to formulate long-range grid development plans, into which short-term actions would ultimately fit. Industrial and transport plans need to be well integrated with electric power development. Some of the most energy-intensive indus- tries can usefully be shifted increasingly into regions where electricity costs are low. Changes in electricity pricing to reflect costs of supply appear to be needed to help promote such a shift. 4.15 Hydro and Mine-Month Thermal Development. The least cost development plan is likely to include numerous hydroelectric projects, which would increase the proportion of hydroelectric generation. However, large projects now under implementation will not increase hydro-s share in total generation significantly. As most large hydro projects have an imple- mentation period of about 8-10 years, and medium projects require at least 4-6 years, a vast and near-term effort both in terms of preparing projects and in terms of committing large capital resources for their implementation within the context of a long-term plan - will be needed. The high priority - 240 - now being given to small- and medium-sized projects with shorter con- struction periods appears appropriate. Attention is also rightly being given to mine-month coal-fired thermal plants, together with long-distance transmission lines to link these and other sources of cheap power to user grids. 4.16 Financial Requirements. Accelerating the growth of electric power production in the second half of the decade, so that it surpasses the 4.5% p.a. that appears possible for 1980-85, would of course require an increase in investment, which in 1979 amounted to about $3.2 billion. Currently this investment level is being maintained as a leading exception to the sharp cutback in State capital construction in 1981. 4.17 Institutional Problems. Some weaknesses evident in the sector may reflect institutional problems: (a) the provincial governments have, by and large, not been able to discharge their responsibility of adequately developing the subtransmission and distribution systems, possibly for lack of resources; (b) small thermal generating stations have proliferated at the provincial and county levels as a matter of expediency rather than as a part of a long-range plan; (c) tariffs are generally uniform throughout the country, while cost structures vary; (d) there is overstaffing with low skilled personnel; (e) the construction of facilities within a province is normally entrusted to the provincial construction companies, which may or may not have the requisite expertise; (f) there is virtually no mobility of manpower; and (g) construction times have been generally longer than in many other countries, particularly for hydro projects, due to a lack of expertise, equipment and building materials or to organizational constraints; but this problem now promises to be overcome. 4.18 Introduction of Modern Technology and Training of Personnel. An acute shortage of manpower is felt in the "high skill" areas. To carry out its expansion program, China will have to develop and implement a large- scale training program for staff at various levels. Several measures can be taken to improve training of manpower and to introduce modern methods, inter alia: (a) providing computer centers for power system studies; - 241 - (b) creating training centers, with full scale digital simulation of the large thermal plants now proposed, for operators; (c) establishing management training centers for technical, administrative and financial staff; (d) training of the staff in utilities and organizations outside China on design, construction, operation and maintenance of power facilities; and (e) strengthening the power research institutes by the addition of equipment and trained personnel. 5. OTHER SOURCES OF ENERGY Geothermal 5.01 Geothermal resources are widely distributed since the whole of China seems to have a relatively high geothermal gradient. Most occurrences seem to be relatively low temperature groundwater suitable for space heat- ing; high temperature manifestations suitable for power generation seem to be more frequent in the mountainous western parts of the country such as Yunnan and Xizang. Geothermal exploration in China is the responsibility of the Ministry of Geology, which has its own drilling equipment and crews and operates through provincial bureaus. Two projects have been identified so far: a geothermal power generation project at Yangbajian, 50 km northwest of Lhasa, and a district heating project in the southeast part of Beijing. There are reported to be other small projects in the pipeline, including one at Tianjin thought to be another district heating project. 5.02 Geothermal energy has not been developed to a significant extent in China. Its role is likely to be limited to some urban heating systems in the colder regions of the country - particularly Beijing, which has a high temperature gradient - and to power generation in regions like Xizang, which lack other energy sources. Noncommercial Energy 5.03 Unofficial estimates put fuels extracted from the agricultural system and from forestry at roughly 250 Mtce, or less than 30% of the total, for about 800 million users. Average per capita use on this basis would be about 0.6 m3 firewood equivalent annually. Rice straw appears to be the most important traditional fuel, as firewood is not available in many areas. Traditional fuels thus play an important role in the Chinese energy sector, but a much smaller one than in most other countries at similar per capita income levels. This reflects a low per capita use of traditional fuels, necessitated by a high population density and low availability of - 242 - forest resources, and the very high industrial fuel demand. In forested areas, as in many other developing countries, however, the cutting that does take place is believed to be having a cumulative negative effects on the nation-s limited forest resources, which are badly needed for industrial materials such as timber and wood pulp,/1 so that steps may be needed to reduce forest cutting while substituting other energy sources. 5.04 A number of approaches have been used to alleviate rural household energy shortages. Mass afforestation campaigns have been undertaken. Coal dust is collected in mining areas, made into balls, and distributed. Biogas is reportedly used on a scale unprecedented in other countries; some 7 million digesters were said to have been built by mid-1979. The standard size unit apparently meets the cooking and lighting needs of a household of five persons, so the fraction of the rural population in households equipped with digestors may not exceed 5%. Kerosene and other petroleum fuels do not appear to be in general use in rural areas. Rural electrification does not seem to include household connections in most cases, so rural household lighting may be an area of large potential energy demand. /1 One of the negative comments on national economic performance in 1980, in the (April 29, 1981) Xinhua communique on fulfillment of the year's plan, was that "trees were felled at random in many areas." Table A.l: GROWTH OF ENERGY PRODUCTION, 1952-80 Electricity Hydro Coal Oil Natural gas Total primary (GWh) (% p.a.) (GWh) (% p.a.) (mln tons) (% p.a.) (m1n tons) (% p.a.) (Bin cu m) (% p.a.) (Mtce) (% p.a.) 1952 7,260 1,260 66.49 0.436 0.008 48.7 1952-57 21.6 30.8 14.5 27.3 54.3 14.9 1957 19,340 4,820 130.73 1.458 0.070 97.6 1957-65 16.9 10.1 7.4 29.2 41.3 8.5 1965 67,600 10,410 231.80 11.31 1.112 187.0 1965-70 11.4 14.5 8.8 22.1 20.9 10.6 1970 115,860 20,460 353.99 30.65 2.870 310.0 1970-75 11.1 18.4 6.4 20.2 25.3 9.5 1975 195,840 47,630 482.24 77.06 8.850 488.6 1975-80 8.9 4.1 5.2 6.6 10.0 5.6 1980 300,627 58,211 620.13 105.95 14.270 640.9 1952-80 14.2 14.7 8.3 21.7 30.7 9.6 Notes: (1) Mtce (million tons of coal equivalent) coefficients based on tce of 7 million kcal, with calorific values assumed as follows: coal 5,000 kcal/kg; oil 10,200 kcal/kg, natural gas 9,310 kcal/m3; hydroelectric power 2,954 kcal/kg. M (2) Oil production includes shale oil. 6 Source: Ministries of Electric Power, Coal Industry and Petroleum Industry. - 244 - APPENDIX Table A.2: ENERGY SECTOR INVESTMENTS, 1977-79 (Y million) 1977 1978 1979 Petroleum 1,969 3,792 2,724 Power 3,306 4,933 4,784 Coal 2,166 3,53- 0.45- Ontal 7,441 12,043 10,756 (%) Petroleum 26 31 26 Power 44 41 44 Coal 29 28 30 National total 36,441 47,955 49,988 Energy as % 20.4 25.1 21.5 Note: Official figures on state capital construction supplied to the United Nations Statistical Office, shown in Annex D, Table 3.2, are a little different in every case, no doubt because of different definitions and coverage. Source: Table 3.8, Appendix Tables A.12 and A.22 - 245 - APPENDIX Table A.3: OIL EXPORTS, 1975-80 (Thousand tons) Year Crude oil Products Total 1975 9,878 2,217 12,095 1976 8,496 2,145 10,641 1977 9,107 2,169 11,276 1978 11,313 2,417 13,731 1979 13,450 3,400 16,850 1980 (planned) 13,400 4,060 17,460 Source: Ministry of Petroleum Industry. - 246 - APPENDIX Table A.4: NUMBER OF UNDERGROUND COAL MINES IN OPERATION, 1975-79 1975 1976 1977 1978 1979 Large Mines /a Southwest 19 20 22 22 22 Northwest 19 20 25 23 27 Central-South 17 26 27 27 28 East 28 29 31 31 33 North 59 62 66 66 68 Northeast 27 30 32 32 34 Total 169 187 203 201 212 Medium Mines /b Southwest 120 120 126 220 145 Northwest 105 90 83 102 89 Central-South 210 197 211 225 215 East 160 173 182 192 192 North 211 207 213 203 204 Northeast 208 201 200 199 195 Total 1,014 988 1,015 1,141 1,040 Small Mines /c Southwest 221 223 238 137 208 Northwest 95 126 133 117 131 Central-South 200 239 248 269 266 East 101 94 111 124 121 North 159 163 158 159 163 Northeast 96 98 111 115 118 Total 872 944 999 921 1,007 /a Large mines - production greater than 600,000 tons per year. /b Medium mines - production 100,000 to 600,000 tons per year. /c Small mines - production less than 100,000 tons per year. Source: Ministry of Coal Industry. - 247 - APPENDIX Table A.5: COAL PRODUCTION BY TYPE AND SIZE OF MINE, 1970-80 (Thousand tons) Underground mines From 0.1 mln Over 0.6 mln to 0.6 mln Under 0.1 m1n Open-pit tons per year tons per year tons per year Year Total mines production production produciton 1970 353,988/a 1,9717 114,256 150,321 77,440/a 1971 392,288/a 12,138 134,504 157,418 88,228/a 1972 410,470/a 11,623 135,388 171,144 92,315/a 1973 416,969 13,548 134,703 174,339 94,379 1974 413,170 14,442 131,728 171,224 95,776 1975 482,240 15,711 172,599 181,777 112,153 1976 483,450 15,680 149,265 204,608 113,897 1977 550,680 14,990 173,717 227,611 134,362 1978 617,860 16,977 203,150 256,036 141,697 1979 635,540 16,557 212,811 254,946 151,226 1980 620,130 n.a. n.a. n.a. n.a. /a Estimate. Source: Ministry of Coal Industry. Table A.G. LIGNITE PRODUCTION BY PROVINCE, 1955-79 (Thousand tons) Estimated cumulative 1955 1960 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1955-79 Total 2,090 8,466 8,831 12,996 13,979 15,641 17,392 18,020 20,346 20,550 23,313 24,856 25,252 302,560 Southwest Sichuan - - - - 37 45 33 12 6 6 11 9 10 - Guizhou - - - - 1 9 - 2 2 4 6 5 7 Yunnan - - - 3,514 4,129 4,206 4,462 4,461 4,906 4,295 6,034 5,746 5,484 Xizang - - - - - - - - - - - - - Northwest Shaanxi - - - - - - - - - - - - - - Gansu - - - - - - - - - - - - - - Qinghai - - - - - - - - - - - - - - Ningxia - - - - - - 12 - - - - - - - Xiniang - - - - - - - - - - - - - - Center-South Henan - - - - - - - - - - - - - - Hubei - - - - - - - - - - - - - - Hunan - - - - - - - - - - - - - - Guangxi - - - 694 950 1,030 1,091 1,309 1,433 1,644 1,830 1,839 1,778 - OD Guangdong - - - 387 429 398 402 428 473 538 590 557 428 - East Shanghai - - - - - - - - - - - - - - Jiangsu - - - - 5 - - - - - - - - - Zhejiang - - - 121 74 43 44 25 22 18 35 33 22 - Anhui - - - - - - - - - - - - - - Fujian - - - - - - - - - - - - - Jianxi - - - - - - - - - - - - - Shandong - - - - 39 43 34 71 343 369 464 504 558 North Beijing - - - - - - - - - - - - - Tianjin - - - - - - - - - - - - -- Hebei - - - 115 84 58 90 272 285 325 290 155 98 - M Shanxi - - - - - - - - - - - - 4 - Nei Monggol - - - 1,034 899 1,056 1,228 1,024 1,048 1,060 1,154 1,604 1,686 - > Northeast Liaoning - - - 3,266 3,300 3,948 4,459 4,713 5,033 5,061 5,207 6,118 6,513 - Jilin - - - 2,124 2,516 2,703 2,917 3,160 3,908 4,079 4,586 4,903 5,231 - Heilongjiang - - - 1,741 1,516 2,099 2,620 2,545 2,889 3,151 3,106 3,385 3,813 - Source: Ministry of Coal Industry. Table A.7: ANTHRACITE COAL PRODUCTION BY PROVINCE, 1955-79 (Thousand tons) Estimated cumulative 1955 1960 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1955-79 Total 13,576 68,179 39,586 56,124 71,922 81,363 83,256 85,638 97,092 99,592 115,467 126,218 125,838 1,547,494 Southwest Sichuan 347 4,060 - 1,216 3,848 4,179 3,716 3,645 4,745 4,655 6,566 6,297 6,138 - Guizhou 177 2,326 - 2,199 2,617 4,717 2,635 3,270 4,143 3,902 4,639 5,339 5,011 - Yunnan 107 1,240 - 1,062 2,148 1,127 1,214 1,237 1,481 1,450 935 1,654 1,439 - Xizang - - - 1 - 22 30 33 47 43 24 60 33 - Northwest Shaanxi 180 71 - - 43 - 47 35 45 59 59 116 66 - Gansu - 914 - 304 408 508 547 947 843 822 1,220 587 1,066 - Qinghai - 56 - - - - - 33 - - - - - - Ningxia - 915 - 529 754 1,050 1,394 1,576 2,197 1,757 2,189 2,654 2,299 - Xinjiang 27 - - 100 883 472 499 482 611 513 809 661 549 - Center-South Henan 3,474 13,517 - 11,329 12,444 14,091 14,880 14,962 13,888 12,338 17,595 19,185 18,133 - Hubei 410 1,510 - 1,886 2,315 2,142 2,135 2,180 2,821 2,986 3,767 4,326 3,087 - Hunan 878 5,771 - 3,801 7,177 7,979 7,934 7,678 9,247 9,323 8,889 9,079 8,572 - Guangxi 5 580 - 96 625 600 479 800 1,308 1,817 1,760 1,798 1,934 - Guangdong 285 3,414 - 4,322 6,240 5,400 5,136 5,201 6,569 7,579 8,661 8,924 7,974 - East Shanghai - - - - - - - - - - - - - - Jiangsu 35 124 - 76 72 313 390 522 773 678 714 846 691 - Zhejiang - 165 - 1,250 579 306 256 243 233 214 322 448 455 - Anhui 35 1,283 - 901 1,055 884 1,118 1,145 1,487 1,422 1,482 2,045 1,916 - Fujian 21 935 - 892 1,340 1,773 2,137 2,239 2,574 2,736 3,262 4,008 4,559 - Jianxi 179 2,727 - 1,650 1,586 1,969 2,388 2,669 2,794 3,082 3,681 4,717 4,679 - Shandong 18 1,082 - 597 833 1,035 1,208 862 1,367 1,866 2,427 2,838 2,978 - North Beijing 1,522 8,360 - 6,238 6,793 6,918 7,083 7,345 7,491 7,461 7,808 8,191 8,133 - Tianjin - - - - - - - - - - - - Hebei 582 3,082 - 3,066 3,451 3,439 3,988 4,582 5,029 5,431 6,746 7,820 8,106 - Shanxi 3,911 11,898 - 11,934 14,232 19,470 20,871 20,996 24,425 25,988 28,245 30,625 33,652 - Nei Monggol 82 421 - 7 20 29 22 27 43 55 53 57 38 - Northeast Liaoning 1,013 2,879 - 2,166 2,115 2,437 2,619 2,785 2,693 2,849 2,933 3,302 3,312 - Jilin 288 514 - 502 328 366 400 144 160 511 598 565 793 - Heilongjiang - 335 - - 16 137 130 - 78 55 83 76 225 - Source: Ministry of Coal Industry. Table A.8* BITUMINOUS STEAM COAL PRODUCTION BY PROVINCE, 1952-79 (Thousand tons) Estimated cumulative 1952 1955 1960 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1952-79 Total 46,166 74,017 318,304 183,384 284,868 306,397 313,467 316,321 309,512 364,799 363,308 411,900 466,787 484,449 6,994,405 Southwest Sichuan - - - - 18,295 21,332 23,109 21,817 20,740 26,112 24,284 36,200 31,633 32,232 - Guizhou - - - - 3,745 5,405 4,527 4,237 4,709 6,905 6,612 9,320 11,343 11,341 - Yunnan - - - - 4,353 4,083 5,610 5,710 6,066 6,528 5,483 6,532 7,440 6,614 - Xizang - - - - 8 13 3 13 17 16 27 53 27 26 - Northwest Shaanxi - - - 6,739 8,173 9,491 10,768 10,681 11,363 11,626 14,725 16,540 17,746 - Gansu - - - 4,496 5,707 5,667 5,937 6,370 1,539 8,105 8,426 9,226 7,684 - Qinghai - - - - 1,118 1,183 1,340 1,529 1,584 1,827 2,024 2,277 2,497 2,158 - Ningxia - - - - 4,199 4,767 5,033 5,494 4,457 5,482 6,436 6,916 7,577 8,197 - Xingiang - - - - 5,488 5,444 5,053 5,066 5,652 6,551 7,404 9,046 10,132 9,712 - Center-South Renan - - - - 17,800 19,556 22,429 21,365 24,068 29,339 24,426 36,114 39,260 40,246 - Hubei - - - - 745 1,190 1,410 1,190 1,216 1,539 1,578 1,876 2,109 1,502 - Hunan - - - - 7,237 6,755 8,017 8,726 7,247 9,178 9,529 11,207 12,924 17,302 - Guangxi - - - - 1,938 2,352 2,300 2,563 3,053 3,314 3,582 3,909 4,648 3,512 - Guangdong - - - - 478 451 460 555 641 783 831 971 1,054 941 - East Shanghai - - - - - - - - - - 42 230 874 1,067 - Jiangsu - - - - 6,916 9,710 10,622 11,438 8,361 10,664 12,431 13,370 16,224 16,566 - Zhesiang - - - - 846 1,066 998 732 192 238 453 736 1,112 1,210 - Anhui - - - - 14,541 16,131 16,763 17,043 13,444 17,772 19,398 20,742 22,488 22,863 - Pujian - - - - 208 301 323 311 250 232 200 202 223 231 - Jianxi - - - - 7,325 8,693 7,054 7,892 6,855 7,583 7,904 9,181 11,236 10,941 - Shandong - - - - 23,457 25,564 26,829 24,461 13,372 26,801 31,125 35,300 38,659 40,845 - North Beijing - - - - 12 19 20 22 26 22 22 - - - Tianjin - - - - - - - - - - - - - - - Hebei - - - - 32,529 35,207 36,451 38,458 41,438 46,654 37,988 38,144 49,447 50,206 - Shanxi - - - - 41,046 41,383 40,467 43,104 46,959 50,986 51,215 59,291 67,624 75,279 - Nei Monggol - - - - 6,446 7,381 7,064 6,694 6,526 8,562 8,874 10,380 11,358 10,887 - Northeast Liaoning - - - - 36,954 36,994 36,099 34,237 36,526 36,496 36,996 35,755 38,754 37,346 - Jilin - - - - 11,487 12,459 12,392 12,366 12,803 13,137 13,415 14,068 15,269 15,363 - Heiongjiang - - - - 26,462 25,078 23,936 24,593 26,259 29,175 31,298 32,929 37,109 42,432 - Source: Ministry of Coal Industry. Table A.9: COKING COAL PRODUCTION BY PROVINCE, 1955-79 (Thousand tons) Estimated cumulative 1955 1960 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1955-79 Total 44,409 197,402 134,878 179,323 207,835 216,610 208,037 193,763 238,490 235,105 267,020 317,616 327,408 3,832,123 Southwest Sichuan 2,466 24,680 - 7,105 14,527 19,599 17,316 15,900 19,587 19,230 23,102 25,593 27,159 - Guizhou 33 3,017 - 2,147 3,456 4,033 2,590 2,366 3,975 3,786 6,851 9,002 9,727 Yunnan 181 3,234 - 3,343 2,576 4,654 4,777 4,321 5,924 5,179 6,424 7,374 6,339 Xizang - - - - - - - - - - - - - - Northwest Shaanxi 184 1,940 - 3,275 3,167 4,872 5,611 5,066 5,243 5,105 6,877 7,770 9,180 - Gansu - 1,326 - 47 615 1,108 597 883 905 1,135 1,039 906 558 - Qinghai 11 670 - 76 88 57 49 23 105 157 211 185 109 - Ningxia - 1,961 - 3,817 4,380 4,573 5,063 3,882 4,859 5,778 6,063 6,852 7,144 - Xiniang 89 1,991 - 536 672 657 708 742 645 1,266 1,839 1,916 1,542 - Center-South Henan 193 10,919 - 15,151 16,622 17,554 16,443 17,703 21,217 16,854 24,352 26,435 26,824 - Hubei 12 430 - 258 499 614 899 556 1,072 1,067 1,309 790 799 - Hunan 567 4,964 - 4,281 5,543 6,642 4,297 2,718 3,575 5,241 3,933 4,716 4,801 - Guangxi - 3,361 - 150 - - - 205 256 268 403 398 353 - Guangdong - 711 - 479 240 460 364 427 488 519 572 625 606 - East Shanghai - - - - - - - - - - - 874 1,067 - Jiangsu 1,578 1,844 - 5,016 9,344 9,894 10,239 7,131 9,699 11,267 12,386 14,881 14,947 - Zhejiang - 333 - 846 1,065 941 698 162 212 423 698 1,040 1,184 - Anhui 3,249 10,976 - 14,497 16,131 16,628 17,043 13,444 17,623 19,200 20,445 21,956 22,344 - Fujian - 270 - 209 301 - - - - - - - - - Jianxi 935 3,916 - 7,043 7,087 6,443 5,619 4,870 5,509 5,694 6,778 8,159 8,332 - Shandong 3,356 19,845 - 20,828 21,877 23,080 19,967 11,103 22,077 26,410 29,820 33,196 35,157 - North Beijing - - - - - - - - - - - - - - Tianjin - - - / - - - - - - - - - - Hebei 11,388 35,160 - 29,238 33,845 32,871 35,311 38,594 44,026 35,847 36,170 46,179 46,677 - Shanxi 1,566 14,508 - 8,852 18,849 18,753 17,281 18,630 19,438 17,669 22,442 38,496 31,530 - Nei Monggol 62 6,072 - 4,171 4,305 4,287 4,322 4,501 6,594 6,997 8,256 8,514 8,540 - Northeast Liaoning 8,750 14,703 - 18,574 14,714 13,988 12,794 13,328 13,173 12,629 12,497 12,999 12,694 - Jilin 1,139 3,656 - 6,830 3,685 3,683 4,029 4,277 7,913 7,503 7,770 8,309 8,604 - Heilongjiang 8,650 29,940 - 22,554 24,247 21,239 22,021 22,931 24,376 25,881 26,783 30,453 41,194 - Source: Ministry of Coal Industry. Table A.10: EMPLOYMENT IN COAL MINING, 1970-79 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 Total Personnel Southwest 267,912 311,980 316,645 423,194 438,463 451,614 459,615 464,855 465,127 467,441 Northwest 242,256 290,167 306,766 269,956 296,015 324,169 342,168 353,003 364,530 363,395 Central-South 446,597 514,229 526,948 587,264 616,239 640,337 687,233 706,050 718,212 720,367 East 491,399 557,369 626,698 654,330 668,029 730,638 790,931 816,427 887,941 869,615 North 486,362 558,955 578,645 630,495 692,545 752,636 784,611 827,383 824,308 858,573 Northeast 550,127 584,660 609,906 686,357 690,683 726,648 749,925 771,352 808,531 824,601 Total 2,484,653 2,817,360 2,965,608 3,251,596 3,401,974 3,626,042 3,814,483 3,939,070 4,068,649 4,103,992 Miners in Nationally Allocated Mines Underground 649,234 698,082 711,606 747,730 763,117 809,565 833,730 897,375 895,085 903,579 Open pit 19,371 20,200 20,645 21,637 25,698 27,173 25,532 26,685 26,022 26,218 Total 668,605 718,282 732,251 769,367 788,815 836,738 859,262 924,060 921,107 929,797 Source: Ministry of Coal Industry. Table A.11: COAL EXPLORATION EFFORT, 1970-79 Region 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 Seismic Set- Months Southwest - - - 7.70 5.62 18.05 18.67 24.33 18.30 20.46 Northwest - - - 48.04 29.06 42.84 67.49 50.25 49.33 51.61 Central-South - - - 47.43 58.83 75.03 78.39 66.15 71.24 69.44 East - - - 119.84 131.43 108.32 122.81 134.16 149.05 139.27 North - - - 28.18 36.52 34.41 43.45 57.57 68.90 82.26 Northeast - - - 49.12 35.64 47.27 42.19 43.67 37.23 44.62 Total - - - 300.31 297.10 325.92 373.00 376.13 394.05 407.66 Drilling Rig- Months Southwest 462.54 537.44 641.63 550.15 533.43 557.56 570.23 575.53 742.50 748.63 Northwest 375.30 518.49 572.34 518.67 554.60 600.46 679.17 718.52 790.44 776.38 Central-South 1,157.84 1,388.45 1,465.50 1,505.03 1,551.47 1,663.67 1,788.80 1,900.54 2,022.94 2,015.31 East 1,299.66 1,755.84 1,875.28 1,934.09 1,732.28 1,645.67 1,793.01 1,940.98 1,998.50 2,153.04 North 256.88 355.20 441.43 510.60 749.52 831.14 903.31 1,027.85 1,249.49 1,409.44 Northeast 786.82 974.47 1,031.37 1,011.53 1,054.96 1,045.49 1,115.83 1,131.24 1,240.59 1,408.09 Total 4,339.04 5,629.89 6,027.55 6,030.07 6,176.26 6,313.99 6,847.35 7,294.66 8,044.46 8,510.89 Number of Wells Completed Southwest 475 923 872 640 484 534 713 850 903 1,038 Northwest 417 579 559 545 497 628 712 866 753 725 Central-South 1,210 1,485 1,617 1,385 1,218 1,406 1,266 1,499 1,365 1,336 East 1,542 2.180 2,082 1,717 1,353 1,680 2,114 2,267 1,871 1,741 North 350 451 528 582 824 948 878 1,020 1,330 1,155 Northeast 774 712 1,294 1,779 953 1,346 1,560 1,560 1,771 1,494 Total 4,768 6,330 6,953 6,648 5,329 6,542 7,243 8,062 7,993 7,489 Meters Drilled Southwest 141,917 230,011 215,955 178,214 163,670 187,690 230,832 287,422 342,344 345,377 Northwest 157,536 184,219 204,807 194,108 197,524 237,371 276,529 328,119 314,944 318,088 Central-South 438,663 476,331 487,629 456,714 426,125 472,066 514,535 575,958 596,749 586,864 East 679,417 835,630 805,680 766,712 559,858 700,568 887,119 1,001,016 973,796 974,144 North 163,067 223,488 226,176 272,671 396,111 484,428 439,152 509,562 609,014 637,955 Northeast 364,741 401,754 411,508 572,775 539,988 660,408 658,338 662,311 678,873 657,989 Total 1,945,341 2,351,433 2,351,755 2,441,194 2,393,276 2,742,531 3,006,505 3,364,388 3,515,720 3,520,417 Source: Ministry of Coal Industry. Table A.12: COAL INVESTMENT BY REGION, 1970-80e (Y Million) 1980 Region 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 (est.) Southwest 368.66 383.46 326.90 258.81 223.82 221.52 147.26 152.66 221.58 199.95 139.45 Northwest 217.10 238.96 231.76 230.85 258.58 266.25 204.43 217.74 312.33 293.86 183.49 Central- South 475.92 429.84 447.88 412.74 406.27 381.11 308.62 367.31 513.12 457.51 325.38 East 321.67 461.09 450.12 434.88 426.06 405.74 462.02 560.82 897.45 929.93 751.08 North 147.99 163.86 216.16 304.92 409.46 491.23 399.92 465.26 758.05 751.10 667.89 Northeast 122.86 143.18 207.41 255.34 272.79 308.91 344.01 402.28 615.13 615.93 379.21 Total 1,654.20 1,820.39 1,880.23 1,897.54 1,996.98 2,074.76 1,866.26 2,166.07 3,317.66 3,248.28 2,446.50 Source: Ministry of Coal Industry. - 255 - APPENDIX Table A.13: MAJOR POWER STATIONS IN CHINA, 1979 Installed capacity No. Name of power station Power grid (MW) 1. Harbin Thermal Power Station Northeast China 300.0 2. Xinhua Thermal Power Station Northeast China 500.0 3. Qianqi Thermal Power Station Northeast China 299.0 4. Jilin Heat and Thermal Power Station Northeast China 450.0 5. Fengman Hydro Power Station Northeast China 553.7 6. Qinghe Thermal Power Station Northeast China 1,100.0 7. Hunjiang Thermal Power Station Northeast China 150.0 8. Liaoning Thermal Power Station Northeast China 682.0 9. Fushun Thermal Power Station Northeast China 245.0 10. Yunfeng Hydro Power Station Northeast China 200.0 11. Huanren Hydro Power Station Northeast China 294.5 12. Shuifeng Hydro Power Station Northeast China 315.0 13. Anshan Thermal Power Station Northeast China 220.0 14. Fuxin Thermal Power Station Northeast China 550.0 15. Yuanbaoshan Thermal Power Station Northeast China 300.0 16. Chaoyang Thermal Power Station Northeast China 400.0 17. Jixi Thermal Power Station Northeast China 192.0 18. Jingbohu Hydro Power Station Northeast China 96.0 19. Douhe Thermal Power Station North China 750.0 20. Tangshan Thermal Power Station North China 305.0 21. Tianjin No. 3 Thermal Power Station North China 375.0 22. Dagang Thermal Power Station North China 640.0 23. Beijing No. 1 Heat and Thermal North China Power Station 340.0 24. Jingsi Thermal Power Station North China 200.0 25. Shijingshan Thermal Power Station North China 735.0 26. Shentou Thermal Power Station North China 350.0 27. Taiyuan No. 2 Thermal Power Station North China 250.0 28. Niangziguan Thermal Power Station North China 200.0 29. Huoxian Thermal Power Station North China 400.0 30. Matou Thermal Power Station North China 650.0 31. Zhanhua Thermal Power Station Shandong Province 250.0 32. Xindian Thermal Power Station Shandong Province 600.0 33. Laiwu Thermal Power Station Shandong Province 375.0 34. Shiheng Thermal Power Station Shandong Province 150.0 35. Jining Thermal Power Station Shandong Province 300.0 36. Xuzhou Thermal Power Station East China 500.0 37. Huaibei Thermal Power Station East China 350.0 38. Huainan Thermal Power Station East China 600.0 39. Nanjing Heat and Thermal Power Station East China 385.0 40. Tianshenggang Thermal Power Station East China 250.0 41. Jianbi Thermal Power Station East China 500.0 - 256 - APPENDIX Installed capacity No. Name of power station Power grid (MW) 42. Wangting Thermal Power Station East China 800.0 43. Zhabei Thermal Power Station East China 464.6 44. Wujing Thermal Power Station East China 380.0 45. Minxing Thermal Power Station East China 473.0 46. Jinshan Thermal Power Station East China 250.0 47. Zhenhai Thermal Power Station East China 250.0 48. Fuchunjiang Hydro Power Station East China 297.0 49. Xinanjiang Hydro Power Station East China 662.5 50. Hunanzhen Hydro Power Station East China 85.0 51. Gutianxi Hydro Power Station Fujian Province 259.0 52. Yongan Thermal Power Station Fujian Province 100.0 53. Anyang Thermal Power Station Central China 352.0 54. Jiaozuo Thermal Power Station Central China 448.0 55. Sanmenxia Hydro Power Station Central China 250.0 56. Luoyang Heat and Thermal Power Station Central China 285.0 57. Kaifeng Thermal Power Station Central China 330.0 58. Yaomeng Thermal Power Station Central China 300.0 59. Danjiang Hydro Power Station Central China 900.0 60. Jingmen Heat and Thermal Power Station Central China 225.0 61. Qingshan Heat and Thermal Power Station Central China 662.0 62. Huangshi Thermal Power Station Central China 270.0 63. Zhelin Hydro Power Station Jiangxi Province 180.0 64. Fenyi Thermal Power Station Jiangxi Province 220.0 65. Fengtan Hydro Power Station Hunan Province 400.0 66. Zhexi Hydro Power Station Hunan Province 447.5 67. Jinzhushan Thermal Power Station Hunan Province 350.0 68. Shaoguan Thermal Power Station Guangdong Province 224.0 69. Fengshuba Hydro Power Station Guangdong Province 150.0 70. Xinfengjiang Hydro Power Station Guangdong Province 292.5 71. Huangpu Thermal Power Station Guangdong Province 250.0 72. Maoming Heat and Thermal Power Station Guangdong Province 250.0 73. Heshan Thermal Power Station Guangxi Province 325.0 74. Xijin Hydro Power Station Guangxi Province 234.4 75. Wulashan Thermal Power Station Ningxia Province 100.0 76. Baotou No. 1 and No. 2 Thermal Stations Ningxia Province 412.0 77. Hancheng Thermal Power Station Northwest China 402.5 78. Qinling Thermal Power Station Northwest China 250.0 79. Shiquan Hydro Power Station Northwest China 135.0 80. Qingtongsia Hydro Power Station Northwest China 272.0 81. Xigu Heat and Thermal Power Station Northwest China 300.0 82. Liujiaxia Hydro Power Station Northwest China 1,225.0 83. Yanguoxia Hydro Power Station Northwest China 352.0 84. Bikou Hydro Power Station Sichuan Province 300.0 - 257 - APPENDIX Installed capacity No. Name of power station Power grid (MW) 85. Yingxiuwan Hydro Power Station Sichuan Province 135.0 86. Yuzixi Hydro Power Station Sichuan Province 160.0 87. Gongju Hydro Power Station Sichuan Province 707.5 88. Douba Thermal Power Station Sichuan Province 300.0 89. Zhongqing Thermal Power Station Sichuan Province 296.0 90. Huayingshan Power Station Sichuan Province 150.0 91. Wujiangdu Hydro Power Station Guizhou Province 210.0 92. Qingzhen Thermal Power Station Guizhou Province 278.0 94. Yilihe Hydro Power Station Yunnan Province 321.5 95. Weihuliang Thermal Power Station Xinjiang Province 59.0 96. Hongyanchi Thermal Power Station Xinjiang Province 100.0 97. Tiemenguan Hydro Power Station Xinjiang Province 47.4 98. Lhasa Thermal Power Station Xizang 12.0 99. Najin Hydro Power Station Xizang 10.76 Source: Ministry of Electric Power. - 258 - APPENDIX Table A.14: ELECTRICITY GENERATION AND INSTALLED GENERATING CAPACITY, 1949-79 Total Installed generation capacity Year (GWh) (MW) 1949 4,310 1,848.6 1952 7,260 1,964.0 1957 19,340 4,635.0 1962 45,800 13,037.2 1965 67,600 15,076.3 1970 115,860 23,770.0 1971 138,360 26,282.0 1972 152,450 29,501.0 1973 166,760 33,925.0 1974 168,850 38,108.0 1975 195,840 43,406.0 1976 203,130 47,147.4 1977 223,400 51,450.5 1978 256,550 57,122.1 1979 281,950 63,015.9 Source: Ministry of Electric Power. 259 - APPENDIX Table A.15: HYDRO AND THERMAL ELECTRICITY GENERATION BY REGION, 1970-79 (GWh) Central Year N.E. North N.W. East South S.W. Total 1970 Hydro 3,350 680 2,670 4,320 6,950 2,480 20,460 Thermal 25,470 20,190 5,670 25,390 11,410 7,290 95,400 Subtotal 28,820 20,870 8,340 29,710 18,360 9,770 115,860 1971 Hydro 5,180 530 3,560 4,310 7,940 3,540 25,060 Thermal 27,200 23,720 7,160 31,170 14,250 9,800 113,300 Subtotal 32,380 24,250 10,720 35,480 22,190 13,340 138,360 1972 Hydro 6,480 410 4,010 4,380 8,780 4,760 28,820 Thermal 28,800 25,840 7,800 35,150 16,480 9,560 123,630 Subtotal 35,280 26,250 11,810 39,530 25,260 14,320 152,450 1973 Hydro 7,390 410 5,700 7,010 12,180 6,210 38,900 Thermal 29,480 27,910 7,460 37,440 16,830 8,740 127,860 Subtotal 36,870 28,320 13,160 44,450 29,010 14,950- 166,760 1974 Hydro 6,020 720 6,960 7,080 13,120 7,540 41,440 Thermal 32,630 30,090 7,520 33,930 16,210 7,030 127,410 Subtotal 38,650 30,810 14,480 41,010 29,22 14,570 168,850 1975 Hydro 5,350 710 8,580 7,920 17,020 8,050 47,630 Thermal 35,810 34,240 8,430 41,570 18,390 9,770 148,210 Subtotal 41,160 34,950 17,010 49,490 35,410 17,820 195,840 1976 Hydro 3,560 560 10,060 7,150 17,170 7,140 45,640 Thermal 39,460 34,920 8,600 47,520 17,830 9,160 157,490 Subtotal 43,020 35,480 18,660 54,670 35,000 16,300 203,130 1977 Hydro 3,850 800 10,440 7,900 16,030 8,650 47,650 Thermal 39,760 37,840 10,350 52,960 23,900 10,930 175,750 Subtotal 43,610 38,640 20,790 60,860 39,930 19,580 223,400 1978 Hydro 2,690 970 9,750 6,450 15,630 9,150 44,630 Thermal 45,830 44,860 12,710 63,690 30,520 14,300 211,920 Subtotal 48,520 45,830 22,460 70,140 46,150 23,450 256,550 1979 Hydro 4,746 1,376 10,416 5,996 17,178 10,408 50,120 Thermal 46,834 49,183 13,512 71,539 35,356 15,406 231,830 Subtotal 51,580 50,559 23,928 77,535 52 ,34 25,814 281,950 Source: Ministry of Electric Power. - 260 - APPENDIX Table A.16: HYDRO AND THERMAL INSTALLED CAPACITY BY REGION, 1970-79 (MW) North North Central Year Type East North West East South Southwest Total 1970 Hydro 1,308 254 912 1,328 1,764 669 6,235 Thermal 3,820 3,373 1,509 4,304 2,406 2,085 17,535 Total 5,128 3,627 2,421 5,632 4,170 2,754 23,770 1971 Hydro 1,324 288 981 1,591 2,250 1,370 7,804 Thermal 3,986 3,489 1,625 4,748 2,473 2,151 18,478 Total 5,310 3,777 2,606 6,339 4,723 3,521 26,282 1972 Hydro 1,335 272 1,231 1,718 2,640 1,499 8,700 Thermal 4,328 3,836 1,726 5,580 3,016 2,296 20,801 Total 5,663 4,113 2,957 7,298 5,656 3,795 29,501 1973 Hydro 1,407 308 1,621 1,893 3,243 1,827 10,299 Thermal 4,611 4,621 1,928 6,655 3,363 2,431 23,626 Total 6,018 4,929 3,549 8,548 6,606 4,258 33,925 1974 Hydro 1,456 339 1,964 2,198 3,872 1,988 11,817 Thermal 5,113 5,310 2,120 7,577 3,560 2,583 26,291 Total 6,569 5,649 4,084 9,775 7,432 4,571 38,108 1975 Hydro 1,564 397 2,290 2,681 4,315 2,181 13,428 Thermal 6,036 6,026 2,274 8,516 4,484 2,608 29,978 Total 7,600 6,423 4,564 11,197 8,799 4,789 43,406 1976 Hydro 1,574 428 2,543 2,846 4,787 2,477 14,655 Thermal 6,676 6,252 2,434 9,438 4,950 2,720 32,492 Total 8,251 6,680 4,977 12,284 9,737 5,197 47,147 1977 Hydro 1,619 517 2,666 3,097 5,071 2,795 15,765 Thermal 7,253 7,182 2,504 10,327 5,560 2,848 35,686 7otal 8,872 7,699 5,170 13,424 10,631 5,644 51,451 1978 Hydro 1,658 573 2,833 3,341 5,841 3,032 17,277 Thermal 8,008 8,123 2,596 11,299 6,735 3,038 39,845 Total 9,666 8,696 5,428 14,640 12,576 6,070 57,122 1979 Hydro 1,713 597 2,933 3,784 6,528 3,556 19,110 Thermal 7,919 9,582 2,936 12,688 7,517 3,210- 43,906 Total 9,632 10,179 5,869 16,472 14,045 6,766 63,016 Source: Ministry of Electric Power. - 261 - APPENDIX Table A.17: GENERATING CAPACITY BY SIZE OF UNIT, 1979 Unit size Installed capacity Percentage (MW) (MW) (%) >250 2,890 4.6 200-250 3,885 6.2 100-200 13,745 21.8 50-100 12,599.1 20.0 6-50 18,564.2 29.5 0.5-6 6,086.4 9.6 <0.5 5,246.3 8.3 Total 63,015.2 100.0 Source: Ministry of Electric Power. - 262 - APPENDIX Table A.18: POWER STATION FUEL CONSUMPTION AND EFFICIENCY, 1979 Fuel consumption Energy Consump- Natural genera- Unit tion Effi- Coal Oil gas Total /a tion /b (kg/ (kcal/ ciency 6 6 3 6 - Region (10 ton) (10 m) (10 ton) (GWh) kWh) kWh) (%) (a) Northeast China 16.4 6.1 665.2 18.4 45,977 0.401 2,807 30.6 (b) North China 23.5 2.1 7.2 19.4 47,522 0.408 2,856 30.1 (c) Northwest 7.6 0.1 80.6 5.5 12,799 0.426 2,982 28.8 (d) East China 29.4 6.1 610.2 28.9 68,745 0.420 2,940 29.3 (e) Central- South China 18.7 2.0 0.6 14.8 32,728 0.453 3,170 27.1 (f) Southwest China 11.1 .. 305.7 7.0 14,590 0.479 3,353 25.6 National overall 106.7 16.4 1,668.9 94.0 222,352 0.422 2,954 29.2 /a Converted to standard coal equivalent of 7,000 kcal/kg. Heat rates used in conversion: Coal 4,415 kcal/kg Oil 10,200 kcal/k Natural gas 9,310 kcal/m /b From thermal stations greater than 6 MW only. Including 9,616 GWh produced in smaller plants, thermal generation by fuel was as follows: Coal 161,502 GWh Oil 55,590 GWh Natural gas 5,260 GWh Source: Ministry of Electric Power. Table A.19: ELECTRICITY SALES BY CONSUMER CATEGORY, 1949-79 Energy sales (GWh) /a (% figures in parentheses) Residential Year & commercial Industrial Agricultural Transportation Others Total /b /c /d 1949 490(14.2) 2,390(69.0) 20 (0.6) 20 (0.6) 540(15.6) 3,460(100) 1952 817(13.1) 4,981(80.0) 43 (0.7) 59 (0.9) 327 (5.2) 6,227(100) 1957 1,975(11.9) 13,605(82.9) 108 (0.7) 70 (0.4) 649 (4.0) 16,407(100) 1965 3,839 (6.8) 47,723(84.0) 3,710 (6.5) 332 (0.6) 1,198 (2.1) 56,802(100) 1970 -- -- -- -- -- - - 1971 4,558 (4.5) 84,203(83.2) 10,433(10.3) 452 (0.4) 1,628 (1.6) 101,274(100) 1972 5,305 (4.3) 101,784(82.3) 12,989(10.5) 707 (0.6) 2,815 (2.3) 123,600(100) 1973 5,830 (4.3) 110,194(81.6) 15,823(11.7) 1,126 (0.8) 2,133 (1.6) 135,106(100) 1974 6,453 (4.7) 107,860(79.5) 17,982(13.3) 1,171 (0.9) 2,242 (1.6) 135,708(100) 1975 7,150 (4.6) 124,782(79.5) 20,877(13.3) 1,435 (0.9) 2,725 (1.7) 156,969(100) 1976 7,721 (4.7) 128,966(78.3) 23,154(14.1) 1,846 (1.1) 3,011 (1.8) 164,698(100) 1977 8,498 (4.7) 142,691(78.5) 24,834(13.7) 2,104 (1.2) 3,564 (1.9) 181,691(100) 1978 8,967 (4.3) 166,087(79.0) 28,742(13.5) 2,280 (1.2) 4,163 (2.0) 210,239(100) 1979 11,252 (4.8) 184,636(79.0)/e 32,493(13.9) 1,323 (0.6) 3,873 (1.7) 233,577(100) /a Excludes self-generation by industries and mini-hydro owned by communes and brigades. /b Urban areas only. /c For details of industrial electricity use, see Annex B, Table 7.4. /d Includes rural residential and commercial use. /e Of which: 35,057 GWh to light industries and 149,579 GWh to heavy industries. Source: Ministry of Electric Power. - 264 - APPENDIX Table A.20: ELECTRIFICATION OF COMMUNES AND BRIGADES BY REGION, 1979 % of communes % of brigades Region electrified electrified (a) Northeast China 98.2 94.5 (b) North China 88.0 78.3 (c) Northwest China 70.0 47.8 (d) East China 90.2 60.7 (e) Central and South China 93.3 64.1 (f) Southwest China 82.6 46.9 National overall 87.1 62.6 Source: Ministry of Electric Power. - 265 - APPENDIX Table A.21: ELECTRICITY TARIFFS, 1980 (FEN /a PER kWh) Category of consumers Northeast China Other areas Average tariff Lighting 9.0 15.0-20.0 16.0 Commercial and small industries 7.0 8.5 7.9 Large industries Demand charge (Yuan /a per month) on maximum demand 5.0 6.0 } on KVA installed 3.5 4.0 } 6.2/b Energy charge 3.5 5.8 } Agriculture Low tension - 5.5-6.0 } High tension at bulk } 5.4 supply 3.5 } National average - - 6.47 /a US$1 = Yuan 1.5, US-1 = Fen 1.5. lb With demand charge prorated over KWh used. Source: Ministry of Electric Power. - 266 - APPENDIX Table A.22: ELECTRICITY INVESTMENT, 1975-79 (Y Million) 1975 1976 1977 1978 1979 Amt. (%) Amt. (%) Amt. (%) Amt. (%) Amt. (%) Genera- tion 2,286 (79.7) 2,651 (82.3) 2,701 (81.7) 3,994 (81.0) 3,746 (78.3) Transmis- sion & substa- tion fa- cilities 455 (15.9) 450 (14.0) 484 (14.6) 693 (14.0) 815 (17.0) Others (includ- ing de- sign & research) 127 (4.4) 119 (3.7) 121 (3.7) 246 (5.0) 223 (4.7) Total 2,868 (100.0) 3,220 (100.0) 3,306 (100.0) 4,933 (100.0) 4,784 100.0) Source: Ministry of Electric Power. - 267 - APPENDIX Table A.23: ELECTRICITY INDUSTRY STAFF, 1979 Number Percentage Technical staff 59,000 6.3 Administrative staff 113,000 12.1 Service staff 100,000 10.7 Labor 554,000 59.2 Apprentices 87,000 9.3 Others 23,000 2.4 Total 936,000 100.0 Source: Ministry of Electric Power. - 268 - APPENDIX Table A.24: THEORETICAL, EXPLOITABLE, AND INVESTIGATED HYDRO POTENTIAL BY REGION Theoretical Exploitable Annual Annual Investi- Region Capacity energy Capacity energy gated /a (MW) (GWh) (MW) (GWh) (MW) Northeast 12,126.6 (1.8%) 106,230 11,994.5 38,391 6,354.5 North 12,299.3 (1.8%) 107,740 6,919.8 23,225 3,622.5 Northwest 84,176.9 (12.5%) 737,390 41,936.7 190,493 7,919.0 East 30,048.8 (4.4%) 263,230 17,902.2 68,794 5,824.6 South- 64,083.7 (9.5%) 561,380 67,434.9 297,365 42,415.8 Central Southwest 473,311.8 (70.0%) 4,146,210 232,343.3 1,305,036 61,678.1 Total 676,047.1 (100.0%) 5,922,180 378,532.4 1,923,304 127,714.5 /a Not included are those which have already been developed and are being constructed. Source: Ministry of Electric Power. - 269 - APPENDIX Table A.25: ADDITIONS TO GENERATING CAPACITY ANTICIPATED BEFORE 1985, BY REGION /a New capacity Net Region Hydro Thermal Total Retirement additions Northeast China 900 2,200 3,100 - 3,100 (Baishan) North China - 2,200 2,200 - 2,200 East China 350 4,175 4,525 1,020 3,505 Central and 2,300 1,955 4,255 - 4,255 South China (Gezhouba & Dahua) Northwest China 1,500 - 1,500 - 1,500 (Longyangxia) Southwest China 420 - 420 - 420 (Wujiangtu) Total 5,470 10,530 16,000 1,020 14,980 /a As of November 1980. Excludes small-scale projects. Source: Ministry of Electric Power. M1N18TRY OF ELECTRIC POWER ORGAN12AT10N CHART Ргоипсеs апд Autonomou5 Regions Uпder [he Овпtгвl Mиistry of Electrк Pov.er Gоигппипг Lяса1 Роvюг Departmantt Чераппд апд Manufstuпng P1anrs Роиег Coпstrucuoп Вигеаи DePartmмts w�М�п гhв М�п,ыгу Neпvork Adm,mstrat�oп 5меппlк RеюатИ Ennnes Со11а� епд School 1 Ргоvис,аl Роиеr Bureau 1 .1,1,п Чудгавlасtгк Еп9,псепп9 1 No 1 Чудгороиеr Глпгггиспоп 1 General Off,[e 1 Northeast Ch,na Еlесгпс Power 1 Electnc Роиег Reюarch 1 North Сhиа College о1 Е1кn,с ог Wamr Сопюrvаооп Math,rery Works Ви'аа" Admm,stnhoп lпяп[иtа Power Епgтееппg апд Pbwer Bureau 2 Departmeпt ot Рlаптпд 2 Sh,ppmg Lюе Fпnngs апд 2 No 2 Чудгороиеr Сопn,ип,т 2 North Сh�па Еlестс Power I Water Сопюгvапоп апд Чудго- � ЧогМеаг2 СИ,па Соllада а1 2 Prelectural Роиеr Вигеаи Harawa,e Fatary Вигеа" 3 oepartment of Ргодигпоп pdm�mstratioп вlосгпс Power Sueпnhc Rв- Е1асlгк Роиеr Епр,пигiпg ог Waeer Сопюгvаbоп Вигеаи геагсм lпsгпитс 3. 5аптепл,а Ebctnc Роwвг 3. 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СоипN Povюr Bure Магhтегу Works Витси Comm,asion Адт,пiгиапоп 3 Е1асlпс Роиег Сопыгим,оп СопюrvаИоп апд Е1ос[пг Wa[er Сапюrvаbоп Burtau Веюагсh lnsututt Роvлг Enginиnng (Еасл Provmaal Pov.er Вил д� 5hanghai НУдгоаlыпс д No �Чудгороиег Сопкггиспоп 5 Dерептеп[ of Реггоппеl д Nопhпиаsг Ch,na Еlемпс Poьver Enpneering Waks Вил Адт rапоп 4 Sпапtпк апд Tachmcal 1п� д 5henghei Tre,mnq 6chool ог Wacer Сопюrvавоп еиrеви Ивs В Department of Labor апд Waye bгтапоп lпгnиа о( Еlиtпс Роивг Епрпигiпу па оип Cmswebon Bureau, Cмtral 5 Naпl,rg Еkсп,с Роькг 5 No 5 ЧудгоОоивг Соппгисг,оп 5 Cantral Chma Electnc Роькr Tes[ Laboratary Load Сап2глl Сепгег, ди[отаиоп Factory Bureau 7 DePartmeпt of Едисаbоп Адт�п,ггrаьт 5 Nап1�п9 Аигnтапоп Reюarch 5 Beiling Elactnc Роvлг Scnool Deslpt Iпsгi2ию апд Rераипд мд lпsгiгигв Sheп lесгпс ower Мапиfасгигiпд Р1апв1 5 Nanyng Lme frtmg, ыW 6 ио Б нчдгороиег Соп:ггпп�ап В оервпп,епг ог Е,папга у•по Mardwere Fыогу Bureau 6 Х,ап ТИегтаl Епрпиппд Re- School 9 оепаггпеп2 ot Саопаl соп� seaкn и:2пию 7 Wuhan Electnc Povяr 7 Ио. ) Чудгороиеr ГдпstrисИоп struchoп 7 СИапрсИиеп Е1ес[пс Роиеr � lпгtгитепв Facrory Bureau 7 Wuhaп H,gh Voltage Reюarch School 10 Вигеаи of 5иррьаы Iпггпиге N В Chmchuan Ронег 5гапт В No В Hvtlropower Сопsггиспоп 8 ЧагЬт Еlьскпс Роиеr 5chool V lпгггипюпв Еаггоrv випеаи t t виааи о+ Eore,p, А(1а,г: В. Иимеег Роwег Чаюисiг lптпv � 9 Nanl,пg Еlесгпс Powr 5chool 9. Vangгhou TaNcammunr- 9 Ио 9 Чудгороwег Гаппгиспоп 1� Bureau of Nuclear Powe[ Епрпаегпд Desigп ИsoNtes � canon АРРагагиs Works Bureeu 1 Northeest Ch,ne Еlемпс 10 Чиатм Е1ыrк Роиег SсИоо1 13 eureau о4 Rura1 Роиег Povwr Оав,gп 1пг2пиtа ' 10 Х,ап Е1кtк Ронег Чеsи 10 Ио 2 Electnc Power Сопкtгисvоп 6иРР1у 11 СИиепgq,пд Е1ыпс Powr Fscгory Витаи 2 Еаsг Сh,па Еlесгпс Роvиг SсИоо1 t4 Ви,в и of теiвсоптит- Dasign 1пsп2ию 11. 2henqгhw Соппгисnоп 11 Месмап�иl Сопы тмiоп Вигваи catip, 17 Chenpfu Hydroelыric Роиwг Магhтегу R ид D 1пг2г З NorMvлst Chma Еlосгпс 5chool гию 12. No, 2 МесИап,саl Construcboп 15. Env ппиепtаl РгоюсUоп Роиаг Deugn lnпrtute O11�ге 13 Х,ап Ekctric Power 5chool 5иррl,ег Ое0аптвпв 13 GегИоиЬа Смsггиспоп Вигеаи 4. SouMvиst СИ,па Electnc 1. Spre Рагв Сотрапу The Min�s[ry's Епт,ег и Ве,упg Ронаг Oesigп 1пгn2ию 1д ЧиЬе, Ekмnc Роуиг 5chool 1 Вигвеи п1 Мо6,1е Роиеr $иррlу 2 5hмtyrr SиРР1юг De- 5. SouM Свпгrаl Ch,na Е1ыпс Раrгтапг 2 Чудгиlесгпс Power Сопsггис- Power Dеп9п lпкпгиге иоп Atlm,mstration 3 T,snm Supplюs DePart� 6. NarMиst Ch,na Чудгороvлг пеп 3 Еkсггк Роие, СопгггисИоп� Sипгоу мд Des,gn Ins[rtuп Adm,msvanoп 4 SМпуипд 5 D 7, Еагг СИ,па Hydrapawer 5urvay 0. Electпc Pov1er P[ess апд Des,gп lпгпгию 5 Wuhan 5.О 5 СотРlею Рbпг Сотоапу 8. Northweat СИ,па HytlroPOwr 6 Х,ап S.D Survay в,д Dм,gn lnstrtuta 6 Eleetnc Pov.er Епрпиппд 7 СИепдди 5 D Сотрапу Iпmrnanoпai 9 Смвпрlи Чудгороwег 5urvey апд oes,pt Иsпtию 7 Еbппс Роиег Садгек 5chooi 10. Sourth Свппаl См�па Чудго� роиег Sипму епд Des�gn 1nsl�tu[e t 1 киепп,пд нудгоРог,�ег sun,.y � апд Dи,р, иsппл b � 7.в д wodd вмk -- 22зев �"� >С Annex F Transport Sector Contents SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . 279 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 279 B. The System and Its Performance . . . . . . . . . . . . . . . . 280 Description . . . . . . . . . . . . . . . . . . . . . . . . . 280 Traffic Trends . . . . . . . . . . . . . . . . . . . . . . . 283 Sectoral Investments . . . . . . . . . . . . . . . . . . . . 285 Performance . . . . . . . . . . . . . . . . . . . . . . . . . 286 C. Major Present Issues. . . . . . . . . . . . . . . . . . . . . . 288 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . 288 Management, Policy and Planning . . . . . . . . . . . . . . . 288 Transport Pricing . . . . . . . . . . . . . . . . . . . . . . 290 Short-Haul Freight Transport . . . . . . . . . . . . . . . . 291 Passenger Transport . . . . . . . . . . . . . . . . . . . . . 291 Transport and Energy . . . . . . . . . . . . . . . . . . . . 292 Employment and Training . . . . . . . . . . . . . . . . . . . 295 D. Conclusions and Recommendations . . . . . . . . . . . . . . . . 295 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . 295 Recommendations for Investments . . . . . . . . . . . . . . . 297 Recommendations Regarding Institutions and Management of the Sector . . . . . . . . . . . . . . . . . 299 Opportunities for Foreign Assistance and Advice . . . . . . . 299 1. SECTOR DESCRIPTION AND TRENDS . . . . . . . . . . . . . . . . . 301 A. The System . . . . . . . . . . . . . . . . . . . . . . . . 301 B. Trends in Transport Performance . . . . . . . . . . . . . . 307 Historical Growth . . . . . . . . . . . . . . . . . . . . 307 Transport and Economic Development . . . . . . . . . . . 309 Performance . . . . . . . . . . . . . . . . . . . . . . . 311 Future . . . . . . . . . . . . . . . . . . . . . . . . . 312 2. PAST DEVELOPMENT STRATEGY AND CURRENT ISSUES . . . . . . . . . 313 A. Transport Development Strategy and the Modes . . . . . . . 313 Self-Sufficiency, Dispersed Development and Industry Primacy . . . . . . . . . . . . . . . . . . . . . . . . 313 B. The Transport Policy and Planning Framework . . . . . . . . 317 C. Transport Pricing . . . . . . . . . . . . . . . . . . . . . 320 D. Short-Haul Freight Transport. . . . . . . . . . . . . . . . 321 - 273 - - 274 - E. Passenger Transport . . . . . . . . . . . . . . . . . . . . 323 F. Transport and Energy. . . . . . . . . . . . . . . . . . . . 325 G. Employment and Training . . . . . . . . . . . . . . . . . . 332 Employment . . . . . . . . . . . . . . . . . . . . . . . 332 Training . . . . . . . . . . . . . . . . . . . . . . . . 334 3. RAILWAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . 335 B. Institutions, Organization and Management . . . . . . . . . 337 Traffic and Operations . . . . . . . . . . . . . . . . . 338 Industry. . . . . . . . . . . . . . . . . . . . . . . . . 338 Capital Construction. . . . . . . . . . . . . . . . . . . 339 Education . . . . . . . . . . . . . . . . . . . . . . . . 339 Planning and Investment . . . . . . . . . . . . . . . . . 339 C. Railway Facilities. . . . . . . . . . . . . . . . . . . . . 342 Routes/Tracks . . . . . . . . . . . . . . . . . . . . . . 342 Motive Power . . . . . . . . . . . . . . . . . . . . . . 342 Rolling Stock . . . . . . . . . . . . . . . . . . . . . . 343 D. Traffic . . . . . . . . . . . . . . . . . . . . . . . . . . 344 Freight . . . . . . . . . . . . . . . . . . . . . . . . . 344 Passengers . . . . . . . . . . . . . . . . . . . . . . . 346 E. Operations . . . . . . . . . . . . . . . . . . . . . . . . 348 Freight . . . . . . . . . . . . . . . . . . . . . . . . . 348 Passengers . . . . . . . . . . . . . . . . . . . . . . . 350 F. Tariffs and Costs . . . . . . . . . . . . . . . . . . . . . 350 G. Finance and Accounting . . . . . . . . . . . . . . . . . . 353 H. Conclusions and Recommendations . . . . . . . . . . . . . . 354 Traffic Demand and Capacity . . . . . . . . . . . . . . . 354 Motive Power . . . . . . . . . . . . . . . . . . . . . . 355 Operations . . . . . . . . . . . . . . . . . . . . . . . 356 Tariffs and Costs . . . . . . . . . . . . . . . . . . . . 356 4. HIGHWAYS AND HIGHWAY TRANSPORT . . . . . . . . . . . . . . . . 356 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . 356 B. Road Institutions, Organizations and Management . . . . . 358 Overall Organization . . . . . . . . . . . . . . . . . . 358 Planning . . . . . . . . . . . . . . . . . . . . . . . . 359 Design and Supervision of Construction . . . . . . . . . 359 Construction and Maintenance . . . . . . . . . . . . . . 359 Training . . . . . . . . . . . . . . . . . . . . . . . . 360 C. The Road Network . . . . . . . . . . . . . . . . . . . . . 360 D. Design Standards and Practices . . . . . . . . . . . . . . 361 Geometric Standards . . . . . . . . . . . . . . . . . . . 361 Pavement Standards . . . . . . . . . . . . . . . . . . . 362 E. Construction Technology, Standards and Costs . . . . . . . 363 F. Maintenance Technology, Standards and Costs . . . . . . . 364 - 275 - G. Road Traffic: Present and Future Trends . . . . . 366 Traffic Counting . . . . . . . . . . . . . 366 Existing Traffic and Future Trends . . . . . . . . . . . 366 H. The Vehicle Fleet . . . . . . . . . . . . . . . . . . . . . 368 I. Road Transport Services . . . . . . . . . . . . . . . . . . 370 Organization . . . . . . . . . . . . . . . 370 Road Transport Costs and Tariffs . . . . . . 371 J. Road Financing . . . * * . . . . . . . . . 371 Capital Improvements Program . . . . . . . . . . . . . . 373 K. Conclusions and Recommendations . . . . . . . . . . . . . . 373 Problem Areas . . . . . . . . . . . . . . . . . . . . . 373 A Strategy for Roads Development in China . . . . . . . . 377 5. WATERBORNE TRANSPORT . . . . . . . . . . . . . . . . . . . . . 379 A. General . . . . . . . . . . . . . . . . . . . . . . . . . . 379 Introduction. . . . . . . . . . . . . . . . . . . . . . . 379 Institutions, Organization and Management . . . . . . . . 381 Dredging . . . . . . . . . . . . . . . .. . . . . . . 382 General Problems in Water Transport . . . . . . . . . . . 383 B. Ports . . . . . . . . . . . . . . . . . . . . . . . . . . . 384 Traffic . . . . . . . . . . . . . . . . . . . . . . . . . 384 Infrastructure . . . . . . . . . . . . . . . . . . . . . 385 Institutions, Organization and Management . . . . . . . . 386 Operations . . . . . . . . . . . . . . . . . . . . . . . 386 Major Port Problems and Recommendations . . . . . . . . . 387 C. Inland Water Shipping . . . . . . . . . . . . . . . . . . . 389 General . . . . . . . . . . . . . . . . . . . . . . . . . 389 Technology . . . . . . . . . . . . . . . . . . . . . . . 390 Tariffs . . . . . . . . . . . . . . . . . . . . . . . . 391 Problems and Recommendations . . . . . . . . . . . . . . 391 D. Coastal Shippingipp . . . . . . . . . . . 392 General . . . . . . . . . . . . . . . . . . 392 Institutions . . . . . . . . . . . . . . . . . . . . . . 392 Traffic . . . . . . . . . . . . 392 Problems . . . . . . . . . . . . . . . . . . . . 393 E. Ocean Shipping . . . . . . . . . . . . 393 Fleet . . . . . . . . . . . . . . . . . . . . . . . . . . 393 Routes and Services . . . . . . . . . . 393 Institutions . . . . . . . . . . . . . . . . . . . . . . 393 Problems . . . . . . . . . . . . . . . . . . . . . . 394 - 276 - APPENDICES A The China Railway Society . . . . . . . . . . . . . . . . . 395 B Chinese Academy of Railway Sciences . . . . . . . . . . . . 397 C Proposed Highway Sector Studies. . . . . . . . . . . . . . . 401 D Chang Jiang Shipping Authority (CSA) . . . . . . . . . . . . 402 E Summary of Major Chinese Port Data, 1979 . . . . . . . . . . 405 TABLES IN TEXT 1.1 Development of Domestic Air Services - China and India . . . 304 1.2 China - Growth of Freight and Passenger Traffic . . . . . . 309 1.3 China - Economic and Traffic Indicators (1957-79) . . . . . 310 1.4 China - Modal Distribution of Traffic . . . . . . . . . . . 311 1.5 Density of Traffic per Route-Km . . . . . . . . . . . . . . 312 2.1 Estimated Energy Consumption in the Transport Sector (1979) . . . . . . . . . . . . . . . . . . . . . . 326 2.2 India - Comparative Employment Intensity in Different Modes of Transport (1977/78) . . . . . . . . . . . . . . . 334 3.1 New Investment in Railways . . . . . . . . . . . . . . . . . 340 3.2 Major Rail Projects in Progress - end of 1980 . . . . . . . 341 3.3 Originating Freight Traffic . . . . . . . . . . . . . . . . 345 3.4 Passenger Traffic 347 3.5 Selected Operating Statistics - Feight . . . . . . . . . . 349 3.6 Selected Freight Rates . . . . . . . . . . . . . . . . . . . 351 4.1 Highways Network . . . . . . . . . . . . . . . . . . . . . . 361 4.2 Highway Geometric Standards . . . . . . . . . . . . . . . . 362 4.3 Illustrative Data on Costs of Highway Construction, Improvements and Maintenance . . . . . . . . . . . . . . . 365 4.4 Traffic Volumes on Selected Trunk Highway (1979) . . . . . . 367 4.5 Motor Vehicles Manufactured in China (1979) . . . . . . . . 369 4.6 Road Transport Financial Costs and Tariffs . . . . . . . . . 372 - 277 - 5.1 Total Water Transport Volume . . . . . . . . . . . . . . . . 380 5.2 Volume of Commodities Handled by MOC Ports (1975-79) . . . . 385 MAPS (Located at the end of Volume II) IBRD 15512R2 Railways, Ports and Airports IBRD 15528R2 Road Network SUMMARY AND CONCLUSIONS A. Introduction 1. Major progress has been made by China over the past 30 years in extending the size of its transport network, improving its capacity, raising its efficiency, and using it effectively to meet economic, political and social goals. Better transport has been an important factor in helping to achieve the political, economic and administrative integration of a country which is the world's third largest in geographical size and populated by one-quarter of the world's people./l The many and varied improvements that have been made to the transport system are the product of major human and engineering efforts by the people of China and, after the break with the USSR two decades ago, have been made largely without foreign financial and technical assistance. 2. Despite the evident and striking progress, however, when account is taken of China's large physical area and population size the transport system is still relatively underdeveloped, particularly in some rural areas with sizeable populations. These areas need cost-reducing transport improvements and easy market access for advantage to be taken of their development potential and for social services to be provided. Growth of traffic and improvement in transport infrastructure and equipment capacity have not always gone harmoniously together. As a result, capacity shortages exist at times on some routes and at some port and railway terminals in the system. At other places, however, excess capacity appears to exist in both infrastructure and equipment, with underutilization of the latter being partly caused by policy and institutional factors. 3. In 1980 pressure on some of the overburdened links in the transport system eased somewhat because of the slowing down of heavy industry and the cancellation or postponement of some major investment projects. This was especially true of short-haul traffic on the railways. However, ports and many long-haul railway lines remained under heavy pressure; and transporta- tion is still considered the binding constraint on coal production in several provinces (Shanxi, Shaanxi, Ningxia, Guizhou and others), at a time when energy shortages are holding back heavy industrial output. Any substantial growth of demands would put a great strain on heavily loaded parts of the system (particularly some rail lines and a few key ports) and risk making transport weakness a more serious bottleneck to development. The need is clear for further well-planned, well-timed, and economically justified /1 In geographical area, it is third to the USSR and Canada and slightly larger than the US (including Alaska), or Brazil, or three times India, or all of Europe (East and West). - 279 - - 280 - investments in infrastructure and equipment in all the transport modes, both to reduce existing transport costs and to cope with the needs of 'normal' traffic growth. Investment emphasis, however, should be placed increasingly on types of facilities and equipment that would contribute to flexibility, and should be directed more than in the past to densely populated areas with intense economic activity in the eastern parts of the country. Opportuni- ties exist to minimize the amount of such needed investments, or to delay their introduction, by improved management and operating procedures, by more appropriate technical standards, and by a variety of policy and other measures that would squeeze greater output from the stock of human and material resources presently available in the transport sector. B. The System and Its Performance Description 4. Technologically, China-s transport sector is a dual economy. Traditional means such as pack animals, human porters, animal or laborer drawn or pushed carts, and wind powered sampans exist in large numbers alongside a growing, modern transport system (see maps IBRD 15512R2 and 15528R2, located at the end of Volume II). These traditional forms are important in short distance freight movement, particularly in the densely populated eastern parts of the country where they remain a significant feature of the transport scene. While their usefulness is not questioned, they often reduce the capacity of increasingly high-cost modern roads, particularly in the vicinity of large urban areas, to carry motor vehicles. In some cases, modest investments to separate old and modern transport means would produce social benefits, including reduction in the number of accidents. The relative role of the traditional sector is shrinking, however, in the face of the increasing amount, geographical penetration and efficiency of modern transport technology, particularly on the roads. 5. This modern transport system has been developed largely to serve the needs of heavy industry by moving the needed large quantities of mineral ores, construction and industrial materials, coal, and petroleum. The relatively slower growth of light industry and agriculture in China has contributed to relatively lower demand than in other countries for the transport of foodstuffs and consumer goods of the types often carried by truck. Recent economic policy changes, however, are likely to affect this situation significantly and require greater road transport (para. 48). Passenger mobility has also been very low as compared with other countries at the same level of development (paras. 33-34). 6. The major consequence of China's chosen development strategy has been that efforts have concentrated on developing the railways as first priority and to a much lesser extent, on inland and coastal shipping. Roads - 281 - and civil aviation have played a smaller role than in many other developing countries, and pipelines are used presently only to transport crude oil - a substantial part of which also moves by rail. In the road sector, the absence of private automobile ownership and the generally low level of motorization have meant much less pressure to build high design standard highways, particularly in and near large cities, such as are commonly found elsewhere in the developing world, to move peak hour traffic to and from work. 7. The railway system in China is the major carrier in the modern transport sector and has more than doubled in size over the last 30 years from some 22,000 route-km to about 50,000 km. By 1979, other than for a small amount of meter gauge line near the Vietnam border and narrow gauge lines elsewhere, China had produced a technically uniform and integrated rail network from a previously run-down, war damaged, uncoordinated system. Over 8,000 km of lines have been double-tracked and over 1,000 km have been electrified - a figure that will quickly rise to 2,000 km as work at an advanced stage is completed. The equipment fleet now consists of some 10,000 locomotives (78% steam; 20% diesel; and 2% electric), 260,000 freight cars and 15,000 passenger coaches. In 1979 this largely Chinese built fleet carried some 1.1 billion tons of freight (38% is coal) and 0.8 billion passengers for 559 billion ton-km and 121 billion passenger-km respectively./l China is now the world's third largest rail freight transport country, after the USSR and the USA./2 While the rail network is now the fifth longest in the world, it is still relatively modest in relation to the size of the country's population and productive area. For example, it is about 20% of the network in the USA, a country of similar geographical size; or 35% of the Soviet Union's; or 20% smaller than that of India, a country which is one-third of the size of China. 8. About 60% of the total of 22,000 route-km of rail lines existing in 1949 were concentrated in the northeast and central coastal regions and made up of different gauges and types. The emphasis in the early 1950s was to rehabilitate and tie them into a coherent standardized system and to build a few important new lines, particularly into Sichuan. After the failure of the Great Leap Forward in 1960, emphasis in railway construction shifted for about five years to improving existing routes and repairing rolling stock. Major capital efforts in new line construction were not resumed until a new and major wave of line construction began in the middle /1 In comparison, Indian Railways performed 163 billion ton-km and 177 billion passenger-km in 1978 and carried 210 million tons and over 2.0 billion passengers (excluding suburban commuter traffic). /2 The 1979 tonnage carried on the railways in China was equivalent to all the rail freight originating in West Germany, France, the UK, Spain, Switzerland, the Netherlands and Japan combined or that in Poland, Hungary, East Germany and Romania combined. - 282 - of the 1960s and lasted until about 1974. The pattern of new rail con- struction reflects economic, national integration, and strategic consi- derations. Rail penetration into Xinjiang, for example, has been influenced by the search for petroleum and by a quest for greater national cohesive- ness and regional income equalization by reaching out to areas populated by minority nationalities. The efforts of extending and improving the rail network have involved major engineering achievements by construction units of the Ministry of Railways and the railway engineering corps of the People's Liberation Army. From 1978 a shift has taken place once more in rail invest- ment policy, this time away from new line construction to the renovation of older lines, including the double-tracking of major trunk lines in the eastern part of the country. The total investment for this renovation purpose is roughly equal to that for new line building. This change in emphasis will ease capacity constraints in key bottleneck sections. 9. Water transport has traditionally been important in China. Inland navigation canals, including the Grand Canal which connects Beijing with Hangzhou, were started two thousand years ago but were allowed to decay or were damaged by military action in the 1940s. Since then, however, many of these waterways have been reopened to river and canal traffic, so that today 107,800 km are navigable. However, only 57,000 km have a usual water depth of one meter or more, and most of the rivers are still in their natural state, with few port facilities, so that their potential is not yet fully used. (Only 2,700 km of inland waterways are now navigable in vessels of 1,000 tons or more.) Inland water transport accounted for 321 million tons of traffic in 1979, but the average haul was only 170 kin, so that in ton-km the inland waterways carried about one-tenth as much traffic as the railways, and only two-thirds as much as coastal shipping, where the average haul in 1979 was 1,232 km. The most important waterway in China is the Chang Jiang which, like the Rhine, Danube and Mississippi, is one of the world's great commercial arteries. It carries ocean-going vessels of up to 10,000 dwt to as far as Nanjing, while in seasons when water is high, ships of 5,000 dwt can reach Wuhan. The river carries a wide variety of vessels including a few modern push-tow barge trains as well as local passenger and freight traffic, and other vessels, to seven designated foreign trade ports and to terminals controlled by central, provincial and local governments and by production enterprises. The 15 ports along China's 18,000 km of coastline engaged in foreign commerce and under the control of the central government handled 212 million tons in 1979, of which only one third were foreign trade cargoes. At present in these coastal ports there are 313 berths of which about 130 berths are of 10,000 tons and above, with an actual handling capacity of 212 million tons (see Appendix E). Many of these berths are very congested, partly because of a shortage of berths and partly because of technically backward materials-handling equipment. Many smaller ports are under provincial government responsibility and participate only in domestic coastal trade. - 283 - 10. China-s ocean and coastal shipping fleet expanded at a faster rate in recent years than that of any other nation. It now amounts to about 640 ships, totalling over 9.0 million dwt, making it about the fourteenth largest in the world. It is estimated that China has spent over $1.0 billion on new and second-hand ship purchases in the period 1976-79. In addition, China has its own shipbuilding industry, which produced 818,000 tons of steel ships for civilian use in 1980. Nationally-owned vessels carry a substantial share of the country's foreign trade. To improve its ports, rivers, canals, and shipbuilding sites, China has built up a dredger fleet of over 500 dredgers and auxiliary vessels with a combined dredging capacity of 100 million m3; about $280 million were invested in new dredgers in the 1975-78 period. A part of this large dredging fleet is underutilized, however. 11. The network of motorable roads increased ten-fold from 80,000 km in 1949 to over 870,000 km in 1979 and was built mainly by provincial, county and commune governments./1 Design standards for all roads have been generally low. Main roads do not permit the fast, direct, heavy truck and bus movements found in many places elsewhere. There is less than 200 km of four-lane intercity highways in China, though small additions such as Tianjin-Beijing and Shanghai-Nanjing are planned and appear justified. There is no private automobile ownership, but cars are owned by government departments, enterprises and diplomats. 12. Domestic aviation is still underdeveloped. In 1978, for example, China had 40,000 domestic flights as compared with 85,000 in India. Passengers carried by air numbered 2 million in China and 4.7 million in India. The difference in service frequency is striking - 1.7 flights per day per route-km in India and 0.3 in China. The aviation system is being upgraded, however, with capacity and service increased by the addition of more jet aircraft, more city pairs being added to the domestic network, and more cities being opened to international services. Nevertheless, CAAC has difficulty in keeping up with the growing demand, including the increasing tourist traffic from overseas. Traffic Trends 13. The total annual tonnage of freight carried by modern transport means in China is now over 2.4 billion tons, or 60% more than that carried in 1970 (1.5 billion tons) and three times the volume moved in 1957 (0.8 billion tons). Total ton-km performed in 1979 were 1,042 billion or 5.75 times greater than the 181 billion ton-km in 1957, and 2.3 times greater than the /1 In comparison, India had about 1.2 million km of roads in 1976 (exclud- ing roads under forestry, irrigation, plantation and similar agency jurisdiction). - 284 - 460 billion ton-km in 1970. New data for 1980 (with a slightly wider coverage) show that of a total of 1,202.6 billion ton-km (up 5.6% over 1979), 47.5% was produced by rail, 42% by water (including some ocean shipping), 6.4% by road, and 4.1% by pipelines./l However, over one quarter of the total (317 billion ton-km in 1979) consists of ocean shipping with average hauls of about 7,500 km (Table 5.1). Together with the shipping data in the same table this new data implies that with ocean shipping excluded, 68.1% of China-s freight traffic of 821.4 million ton-km moved by rail, 10.3% by coastal shipping, 9.1% by road, 6.6% by inland waterways and 5.8% by pipelines. Previous Chinese transport statistics underestimated the amounts of traffic since they relate only to traffic "handled by transport departments" (i.e. specialized transport agencies such as the railway and trucking and bus organizations), and excluded the output of vehicles owned by ministries, agencies, local governments, enterprises and communes. Even the new data continue to exclude traffic by traditional means, which in many countries would go by road vehicle. The water transport statistics, unless adjusted, include ocean shipping transport performed by China-s own vessels; and the passenger transport statistics have omissions (para. 16). International comparisons, therefore, are difficult and risky. 14. Rapid growth took place in transport output between 1952 and 1957, when the railways accounted for about 75% of total freight ton-km and some 65% of the tonnages carried. A first peak in transport performance was reached in 1959; then, after a decline to a low point in 1961 as a result of economic slowdowns associated with the Great Leap Forward period, recovery took place up to 1966, only to decline again in the late 1960s due to the disruptions of the Cultural Revolution. From 1970 onwards, however, there has been a fairly steady average rate of growth in total transport output at around 9% p.a. The major long distance traffic flows are raw materials such as coal and oil moving from north to south and from west to east. Coal in particular moves east from the Inner Mongolia-Shanxi area to consumption points in the coastal areas. Some of it moves south either directly by rail, or through the ports of Qinhuangdao, Qingdao, and Lianyungang by coastal shipping. Imports and consumer goods move from the eastern industrial centers such as Shanghai and Tianjin towards the interior. 15. In China, as in other low-income developing countries, domestic freight transport output (ton-km) since 1957 has been increasing faster than the gross value of total output - at least 7.5% average p.a. /2 as compared with roughly 5% p.a., or an elasticity ratio of around 1.5. In other words, a 10% rise in national income is associated with a 15% rise in freight traffic. The growth in traffic reflects the dominance of heavy industry /1 See para. 1.13, footnote 1. /2 Figure arrived at by adjusting total for estimated ocean transport; without this adjustment it would be 8.5%. - 285 - which has required bulk movements of such goods as coal, cement, steel and construction materials over distances averaging around 435 km in 1979, or nearly twice the average distance hauled in 1957. The relationship of freight growth to GNP growth is, however, less than that experienced by some other countries at low-income levels, and reflects the development policy involving limited interregional trade in foodstuffs and consumer goods. In India, by comparison, freight traffic grew twice as fast as national income for the first two decades after independence, but the growth rate has tapered off in the last decade, with freight traffic now rising at about the same rate as national income. 16. The rate of increase in passenger traffic in China (6.5% p.a.) has been above that of national income. On the railways the average annual rate of growth in passenger traffic since 1957 has been around 5.5% p.a. Rail and road passenger traffic in India grew at this same average rate during the period 1950-70, but at over 8.0% p.a. in the 1970s. There has been rapid growth in passenger traffic by road in China also, but the data are seriously incomplete, since they exclude urban bus services and long distance passenger traffic to and from Shanghai and Tianjin. Sectoral Investments 17. Over the period 1949-79 some Y 110 billion, or 17% of all new investment coming under the heading -State Capital Construction', went to transportation. This 17% share is comparable to experience in many other developing countries./l However, this figure apparently excludes renewals which are generally included in capital investments. Similarly, the contribution of transport to GDP in China is of the same order of magnitude (5%-6%) as that in other countries. 18. In the first two decades after liberation the railways absorbed well over 50% of all new investments in the transport sector, but since then the proportion seems to have fallen to around 50%. Total investment in new /1 The Chinese numbers do not include posts and telecommunications, but at the same time, state capital construction excludes a substantial share of China's fixed investment. A study of 45 countries in the early 1970s showed the average percentage share of transport and communications in gross fixed investment to be 15% for countries in the then $100-200 per capita income range; 19% in both the $200-500 range and over $500 range. By contrast, in the USSR and Eastern Europe the average was 12%. There are definitional problems with these statistics. The conclusion of the study was that there is no "golden rule" for how much to invest in transport at any particular stage of development. The sums required will be a function of many factors relating to a country's size, its stage of development, its resource endowment, the location of resources, the levels of industrialization and urbanization, the degree of dependence on foreign trade, etc. - 286 - railway lines construction since 1949 has been estimated at some Y 30 billion. While the railway system was economically and militarily important before 1949, 'the railway age' in China has matured only after then, and at a time when the former dominant position of railways in many other countries was being rapidly eroded by a dynamic road transport industry based on declining real prices of fuel. One consequence of China's late railway development is that unlike the US, Western Europe and Argentina, for example, the rail network does not include large numbers of uneconomic branch lines that were built before road transport was a competing alternative. 19. Because of the recent expansion of external trade, increasing emphasis has been given the development of ports and ocean shipping. Investments in ports have totalled about Y 3 billion in the 1970s. Investments in the shipping fleet have been very large, averaging about Y 500 million p.a. since 1976. By contrast, investment in inland waterways over the past 30 years has been only Y 600 million or about Y 20 million per year. 20. The road sector has received secondary attention in the transport scene; nevertheless, some 25,000 km/year have been added to the network, albeit at rather low standards. Only limited information is available on the road network (its location, criteria for building new roads, levels of traffic, etc.), but it is probably safe to say that given the limited funds available the development strategy employed has been reasonable; i.e., maximize km length for the limited money available and upgrade network segments only as traffic development warrants, rather than build capacity well ahead of demand and construct prestige expressways near large cities and international airports. Performance 21. The utilization of the transport system is generally high. This is particularly true in the centrally run railway system, where the discipline of the labor contributes to make it highly efficient as compared with railways in some other countries. The best indicator of the intensive use of the system is the average rail freight traffic density (net ton-km million/route-km), which is much higher than in other major railways, except those of the USSR: - 287 - Net ton-km/ Passenger-km/ route-km route-km (million) (million) USSR 24.7 2.4 China 10.9 2.4 US 7.7 0.1 Romania 6.9 2.1 India /a 4.5 4.4 Poland 4.2 1.7 Brazil 1.0 1.1 /a Broad Gauge only - on the meter gauge system, 0.9 m. and 1.6 m. for freight and passenger traffic, respectively. Increased productivity of the rail system is reflected in the growth of freight and passenger traffic density per route-km from 2.5 million net ton-km/route-km in 1952 to 10.9 million in 1979 - a 5.5% p.a. increase, with passenger traffic increasing from 0.8 million passenger-km/route-km to 2.4 million in the same period, a 4.5% p.a. increase. 22. The rail network does not appear to have been extended to the point where average traffic densities have begun to fall. Most new lines appear to carry sufficient traffic to meet a 'rule-of-thumb' threshold test (2.0 million net ton-km/route-km) for new line investment. Lack of infor- mation about traffic density on individual lines in China prevents saying whether all new line construction has been economically justified. The few operating statistics available such as rail wagon turnaround time (3 days) suggest an intensive use of railway capital in China. 23. In both the water and road modes, however, equipment seems to be used less extensively than on the railways. This is somewhat in the nature of those modes - many small production units operating independently from the units making decisions about infrastructure investment, and not centrally managed like the railway. As in most countries, the multiplicity of users and the nature of the work done often lead to small unit loads and a less than optimal use of some equipment, in order to provide higher levels of service. In China, however, the division in decision making between operators and infrastructure owners is less clear than in most countries, since provincial transport bureaus both construct and maintain roads and operate fleets of trucks and buses. Still, overall, these bureaus own only about 15% of the vehicle fleet. A significant but unknown amount of trucking and bus transport is done by enterprises on their own account. - 288 - 24. The performance of the system is impressive, given that vehicle technologies in China have not kept pace with those being developed and used in many parts of the world. The railway is mainly steam powered. There are technological problems with diesel locomotives and, to a lesser extent, with electric locomotives. Trucks are small, gasoline powered, and energy inefficient. Airplanes do not operate in bad weather conditions because of limited navigational aids and landing systems. While technologies may be lagging, the general level of maintenance of rail tracks, roads, ports, and of vehicles and equipment is generally quite high. C. Major Present Issues 25. Issues that seem to be presently important relate to the capacity of the transport system; its management, including planning and development; the respective role of various modes and, in particular, the modal allocation of short distance traffic; the role of prices on the sector; the growing demand for passenger transport; the appropriate choice of transport technologies in relation to energy; and, finally, staff constraints and training. Capacity 26. No forecasts of future traffic growth in China were available. However, the elasticity of demand for freight traffic growth is expected to be lower than in previous periods, and might well fall below unity in the period 1980-85, because heavy industry is being de-emphasized. But at the same time, within the total, the increased emphasis on consumer goods is likely to imply a rapid rise in demand for road transport. Despite this shift, increased demand on the railways is likely to be substantial, especially in the second half of the 1980s as coal production rises. Meanwhile, the railway authorities- forecast of a 6% p.a. increase in passenger traffic to 1985 implies over 300 million more passengers in that year, or about 50 billion extra passenger-km, assuming the present average distance travelled per passenger. The level of past passenger traffic in China, however, has been determined largely by the carrying capacity provided and has left a significant potential effective demand unsatisfied. Addi- tional investments that would be needed in infrastructure and equipment and vehicles for the various modes, to move additional traffic in 1985 of the orders of magnitude suggested above, are likely to be substantial and are at the heart of any future national transport plan. Management, Policy and Planning 27. In China, as elsewhere, there are many leading actors in the transport policy and planning process as well as many others who play smaller supporting roles. At the national level, transport is administered - 289 - by two key Ministries - the Ministry of Railways (MOR) and the Ministry of Communications (MOC), which covers national roads, main ports, coastal and ocean shipping, and some inland water transport. In addition, there is the Ministry of Petroleum (MOP) for pipelines; and the Civil Aviation Adminis- tration of China (CAAC), a special agency of the State Council, which runs the national airline. Decision-making in the railways, pipelines and aviation is highly centralized, but in the roads and water transport subsectors, the provincial, county and commune governments as well as production enterprises play very important roles. Transport decisions have to be coordinated, therefore, horizontally at the central level among the major government ministries and agencies, and vertically, between the central ministries and the provinces and lower levels of government. 28. Horizontal coordination seems to take place mainly through the process of approval and scheduling of investment and annual operating plans by the State Planning Commission (SPC) and the State Economic Commission (SEC), with the State Capital Construction Commission (SCCC) influencing the process by its involvement in project design and project implementation, scheduling plans for major projects. Given the limited number of staff dealing with transport planning - 25 in SPC and 30 in SEC - and the wide area of their responsibilities, the amount and depth of analytical and policy work conducted by these bureaus can, at best, be only limited and somewhat superficial. The staff involved rely largely on work done by the operating ministries and agencies (MOC, MOR, MOP, CAAC), and are not equipped to undertake independent investigations and analysis. The recent re-estab- lishment of the Institute of Comprehensive Transportation within the SEC is a significant step towards getting an overall picture of transport developments and analyzing problems from a sectoral rather than a limited modal viewpoint. The venture should be encouraged by providing it with the staff and other resources needed to undertake, among other things, the following functions: (a) surveys from time to time of actual traffic patterns and real transport costs in the different modes; (b) analyses of the factors influencing trends in transport demand; (c) examination of the transport price structure for freight and passenger traffic in each of the modes in relation to their costs; (d) studies of the effects of fiscal policies and subsidies at the Central and provincial government levels to see what, if any, resource allocation dis- tortions are taking place and whether and to what extent objectives are being achieved; (e) monitoring the functioning of the transport system in order to identify promptly impending problems or major imbalances (contradictions) between demand and supply; (f) suggesting appropriate policy principles and prescriptions for the sector to help it achieve national objectives; and (g) establishing cost-benefit appraisal techniques for use by the operating agencies and ministries and in cooperation with their planning units. Information needed for much of the above seems now either scanty, or not available to or productively used by the SPC/SEC in their formulation of transport plans. Strengthening the transport statistical base is a key step in improved transport planning, management decision making, and policy formulation. - 290 - 29. A need for improved coordination at the operating level seems to exist also. For example, there appears to be unnecessary transshipment of cargo in the road and water modes, involving unnecessarily circuitous, energy- wasting journeys. Transport movements are undertaken by a variety of administratively separate operating units, as well as production enterprises, each of which is concerned with meeting planned physical production targets rather than minimizing the total distribution costs of traffic flows. As a result, there has been some unnecessary duplication, and thus underutiliza- tion of facilities and equipment. However, some excess capacity is necessary in order to provide adequate levels of service for which shippers are often willing to pay a premium price. Transport Pricing 30. As in other sectors, prices in the transport sector in China are set by administrative orders emanating from the relevant State, Ministerial, Provincial or local authority levels. Once set, prices tend to remain fixed for long periods of time. The railway tariff, for example, has been largely unchanged for 15 years. Although the picture obtained on pricing in the system is incomplete, there is some evidence of the following: (a) railway tariffs have a significant effect on regional and, possibly, commodity cross-subsidization; (b) modal tariffs may be producing distortions in the modal allocation of traffic, e.g. some traffic moves by rail that could move more economically by road for short hauls or by water transport for long hauls; (c) short distance passenger rail tariffs do not cover the costs of services and are lower than bus tariffs for the same type of service, thus encouraging short distance rail movement and increasing rail congestion; (d) port prices do not encourage prompt clearance of ships and cargoes; (e) high trucking prices charged by the transport corporations for very short haul freight traffic have the effect of encouraging traditional transport which, paradoxically, adds to traffic congestion and causes higher social costs for modern transport. 31. Transport agencies in China could benefit substantially from the analytical basis of cost-finding procedures and techniques which have been developed recently - in Canada, for example. Such better understanding of the transport costs for different modes, routes, commodities, seasons, - 291 - terrain and so on, will be needed if transport prices are to play greater market-signalling and managerial incentive roles, as being advocated presently in China. Short-Haul Freight Transport 32. Although detailed information on distance distribution of freight movements was not available, a Chinese source indicates that some 23-30% of rail freight moves less than 100 km and 13-19% moves less than 50 km./l The distance below which road transport is economically superior to rail transport is not a simple, unique figure. It depends upon a variety of factors such as the nature and volumes of commodities to be transported; the size and type of vehicles used, and the price and type of fuel they consume; road conditions; the amount of transshipments, etc. Analysis undertaken in China suggests that for distances up to 50 km for a 7-ton truck and up to 70-110 km for a 13-ton truck, the ton-km cost of road transport is lower than for a full rail car load. In other countries, trucking is more cost effective over much longer distances. The implication of the above figures is that there is a potentially larger role for road transport in short-haul traffic which, among other things, would ease some of the congestion in the rail system and reduce transit times. Passenger Transport 33. The people of China are still relatively immobile - about 200 passenger-km per capita per year by modern transport means as compared with, for example, 710 in India in 1977-78, 411 in the USSR in 1950 and 993 by 1965. The low mobility results, in part, from the low density of the transport network and its limited capacity. On some major rail lines there is nearly no room to increase the number of passenger trains or to lengthen them without reducing freight transport. Passenger equipment is also in short supply. In 1979, for example, the railway had only 15,000 passenger cars; and there were only 35,000 passenger buses, or one for every 30,000 people in China - and no private automobiles. 34. The low mobility is a concern for the development of education and other services to rural areas (such as agricultural extension), with low levels of service and difficulty of access to some areas being the object of many complaints. Any modest percentage increase in mobility resulting from increasing incomes and population growth will generate very great pressures on all transport modes, in terms of absolute numbers of people wanting to travel. For example, a continuation of the roughly 6% p.a. long-term passenger growth rate implies almost doubling by the end of the 1980s. Such a growth rate is entirely consistent with experience elsewhere. /1 "Rational Allocation of Short-Haul Transport between Rail and Road," Qi Yong, Beijing, 1980. - 292 - One option open to the Government is to make modest improvements and let poor service standards act as the rationing system to cut the demand, but this would add to what is already a frustrated or pent-up demand situation in passenger travel, with adverse public reaction. Alternatively, the Government can make a policy decision to meet a substantial amount of the demand. To do so will mean that the vehicle manufacturing, road improvement and energy implications of increased road transport must be confronted as major policy decisions. It will also mean a greater use of prices to influence transport demands and provide the revenues for the generation of funds to invest in the system. Transport and Energy 35. Although China, unlike many developing countries, is not at present a net energy importer, energy supplies are expected to be one of the principal constraints on China-s growth in the 1980s. The role of the transport sector in the energy scene of China, therefore, needs examination. First, opportunities must be taken to encourage a more efficient use of energy consumption in the sector. Their effect will be modest relative to total energy use, because the transport sector accounts for only about 5% of the total commercial energy consumption, but the sector-s share is higher at 16%, and is rising, in petroleum and its products, which will be especially scarce. Secondly, the differences between transport modes in types of energy used and in relative energy intensiveness (i.e., the energy input needed to produce a ton-km or passenger-km) have important implications for policy decisions relating to motive power and, particularly, the relative rates of dieselization and electrification on the railway and the extent of dieselization in the road transport industry. Decisions about these have, in turn, important implications for vehicle equipment manufacturing. Thirdly, since very large volumes of coal (and lesser amounts of coke and petroleum) are handled by the railways, ports and coastal shipping, the efficiency and transport capacity available in handling fuel are relevant to major decisions that have to be taken within the energy sector itself (e.g., mine-mouth versus load center electricity generation; coal washing before transport; the size and timing of contracts for coal exports). Transporta- tion of coal is now said to be a principal bottleneck limiting China's ability to mine and distribute coal, particularly in Shanxi and adjoining provinces, where coal reserves are huge and extraction is relatively cheap. 36. In 1979, of the 5% of total energy consumed by the transport sector, rail used roughly 40%; roads 47%; and water 13%. The small share of transport in China-s total energy consumption contrasts sharply with experience elsewhere. For example, in high and middle income countries, the share is typically in the 15-25% range, and it is in the 10-20% range in low income countries. In many countries, road transport accounts for 70-85% of the energy consumed directly by the transport sector, with rail and air transport consuming about 3-5% and 5-10% respectively. China clearly is different. The role of railways is much more important than in any other - 293 - large economy, and road transport is of lesser significance than elsewhere, particularly since there is no private automobile ownership. One consequence is that unlike in many Bank member countries, the level of gasoline pricing for automobile use is not a major issue - the average price for gasoline in China is estimated to be 70% above the "international price." Nor, since there are very few diesel trucks, is the question of the relative prices of gasoline and diesel significant as yet in the development of domestic truck and bus manufacturing and transport industries. Looking forward over the next few years, however, the demands of the transport sector, and particularly road transport, are projected to be the fastest-growing element in China-s demand for oil, and as a result will have a large impact on the net trade balance in oil, which in turn will strongly affect the balance of payments in oil. Already in 1980, transport was responsible for about 16% of China's consumption of petroleum products. By 1990, in some scenarios, this share would reach 30%./l 37. Chinese experts estimate that perhaps 40% of the energy consumed in the sector could be saved by feasible technology, policy and management changes. Such changes would include reducing steam traction on the railways in favor of electric and diesel traction; meanwhile improving the heat efficiency of the steam locomotives, if only by elementary steps such as burning pre-sorted coal; developing more efficient gasoline trucks and larger diesel trucks; increasing the use of enterprise trucks as public carriers to reduce empty running; improving roads, driving skills and vehicle maintenance; reducing transshipments; shifting traffic from land to water transport while making needed improvements in the inland waterway and port system; increasing the use of storage to reduce seasonal peaks, etc. While many of these improvements require major investments, and would take time to yield significant energy savings, a few require managerial and operational changes that should be well within the capacity of the authorities and agencies involved. 38. China's railway is exceptional among the world-s major railways in that 78% of its locomotive fleet consists of steam locomotives, with 20% being diesel and 2% electric. Chinese railway experts know that burning coal in steam locomotives is a low-efficiency, uneconomic form of coal utilization, and that the route to fuel efficiency is towards the higher heat efficiency of diesel and electric locomotives which also provide increased line capacity over steam operation. The practical problems, however, relate to such questions as how fast the changeover should be, how much of each should be used, on which lines first and at what costs, how fast maintenance repair and maintenance facilities can be converted; and what would the implications be for the phasing down of steam operations and locomotive production. The question of locomotive power choice is a complex one with economic, technical, social and financial implications that go beyond the internal aspects of railway management and operations. There are not only spillover effects /l See Main Report, Table 6.5 and para. 6.74. - 294 - into the electricity supply, petroleum and coal producing industries, but also environmental, labor and national security issues. Any decision must recognize the "trade-offs" involved and price correctly inputs such as labor and the alternative energy types, in terms of their opportunity costs. In the longer run, electrification is the solution for many of China's heavy traffic lines, but at this point the railways do not seem to have a firm, detailed plan for the modernization of motive power. To maximize the impact of the gradual introduction of electric traction, such a plan should be developed which, among other things, would cover the production of modern, efficient locomotives suitable for the operating conditions of the system that is closely harmonized with rail line improvements where these are justified. Such a plan should also include a time-phased strategy for the use of diesel in the short to medium term and the gradual phasing out of steam. 39. Chinese trucks have low fuel efficiency; their consumption is reported to be 15% higher than for the same type produced elsewhere but, at least, they do run on very low octane gasoline. One Chinese estimate is that a 10% reduction in the fuel consumption of trucks would save annually 800,000 tons of gasoline, or the equivalent of some $250 million at current international prices. Investments to achieve such savings would seem to give a good and quick "pay-back." Larger size diesel trucks also need further development for specialized functions such as handling containers. However, because of technical problems with diesel engines in China, the wax content of diesel fuel, and the limited potential for increases in diesel fuel supply, the prospects of a major shift to diesel power in road transport in the short run are not high. But this is the longer run direction towards which progress is necessary. 40. Coal shipments of over 400 million tons account for 38% of the total tonnage moved by rail in China. This compares, for example, with 33% in India (1977-78); 32% in the US (1979); and 30% in the USSR from 1928-53. Coal is the main source of energy in China and will continue to dominate the whole transport system for many years. Given the present limited oil prospects, if coal production is assumed to increase at, say, 4% p.a. for the next decade, and the current transport coefficient for coal continues to apply, coal traffic on the railway would amount to 600 million tons in 1990, an increase of about 45%. To move this additional traffic would require substantial rail investment, particularly if present coal marketing distribution and transportation practices continue unchanged. The amount of investment required, however, can be reduced by measures such as (i) an increase in the washing of coal prior to shipment; (ii) more mine-mouth generation of electricity; (iii) the introduction of larger size unit coal trains; (iv) some increase in dieselization on the railway; (v) an increased use of water transport; and (vi) the use of slurry pipelines - if these are demonstrated to be superior in economic and technical terms in China and do not divert large quantities of water which would be needed in agriculture. - 295 - 41. The suggestion has been made within China to set up an organiza- tion to carry out major comprehensive studies related to energy production, consumption, and distribution, and to make recommendations for consideration by decision-making bodies. The idea of comprehensive analysis of the use of coal, including its transport, has great merit. Employment and Training 42. In China about 7.5 million people are employed under the broad heading "transport" - railways, 2.5 million; road, over 3 million; water transport, about 1.8 million; and the balance in aviation and other modes. These figures do not include the traditional transport sector, but they include personnel involved in services such as housing, health and education provided by the transport agencies. Until disaggregated data is available, it is not possible to make meaningful labor productivity comparisons between transport in China and in other countries. 43. The importance of trained personnel to manage, operate, advance technical knowledge and undertake planning and investment studies in the transport industry cannot be overstated. This is well recognized in China, and significant efforts are now being made to overcome the shortages in trained personnel resulting from the neglect of training and technical education during the Cultural Revolution. The efforts, however, do not seem to be commensurate in size with the immense task needed to overcome the backlog of missed training and to meet the needs of a growing future transport system. Nor are they sufficiently oriented to interdisciplinary studies, economic analysis and management decision making. To the mission's knowledge there is no institution in China which imparts training to those who have to look at the transport system as an integrated process and provide the policy and planning frameworks for its evolution in a coordinated way. To stimulate such training, and associated applied research studies, a national level center or transport institute seems desirable, as well as an increased study of different aspects of transport technology, planning and operations in the universities. In addition to such formal education, short-term courses are needed in China, and visits abroad are desirable, to foster the professional development of existing staff. In this respect, the Bank's Economic Development Institute might be a partner. D. Conclusions and Recommendations Conclusions 44. While the mission collected a considerable amount of statistical information, gaps remain in the information available. Therefore, the following conclusions and recommendations are tentative and qualitative rather than quantitative. - 296 - 45. In general, many of the recent policy decisions in the sector appear headed in the right direction. To cite a few: the growing emphasis on investments for passenger services in the railways; the authorization of enterprise-owned trucks to perform for hire services, thus reducing empty back hauls; and the opening of the Chang Jiang ports to international trade, although for the moment they are limited to Chinese ships only./1 Government staff dealing with transport appear well aware of the major issues. 46. Regarding development of the railways and highways sectors, the emphasis on consolidation of the existing system rather than on further major expansion (reflecting the general economic policy of adjustment) seems appropriate. Most main rail projects now under construction or currently planned emphasize capacity increases on existing lines rather than new line construction, and new efforts at large-scale extensions of the network may only take place again in five to ten years. For roads, it appears that a number of sections are beginning to reach congestion levels at their present design standards. While the highway network will continue to be extended, at relatively low standards, to connect areas presently not accessible by motor vehicles, a large portion of the road investment can be expected to go for upgrading existing roads. 47. Although the above consolidation approach for rail and roads appears adequate, it needs particularly careful assessment in the ports sector and in regard to inland waterways. The world trend in external trade and coastal shipping has been to move from estuarial to coastal locations so as to faci- litate access of larger ships, while curtailing maintenance dredging expen- ditures. The mission recommends serious investigation of the further possi- bilities for developing deep water ports either at some existing port sites or at some new locations as part of a national port strategy and plan. At the same time, however, China can almost certainly benefit from the increased attention expected now to be given to the improvement of selected inland waterways and associated port facilities. 48. Regarding future transport demand, no forecasts are available. Qualitatively, it is clear that the new economic policies will affect transport demand in total as well as structurally. The proposed shifts in emphasis from heavy industry to light industry and agriculture implies a lesser growth rate than in the past for the transport of bulk commodities such as coal, ores, steel, etc., and a faster growth rate for light industry /1 Their concern about them can be illustrated by some of the titles of multi-agency meetings attended by people from all over the country which took place in 1980: "The National Academy Forum on Pricing Policy for truck Transport and Short-Haul Rail Transport;" "The National Conference on Energy and Transport." Papers have also been prepared on the need to pay special attention "to Travel in the Life of the People" and on the "rational allocation of short-haul traffic between rail and road." - 297 - products and foodstuffs. Since these products usually go shorter distances and between many dispersed origins and destinations in small size shipments, they will be more suitable to road transport than to rail transport. The relaxation of centralized management of the economy, combined with growing incomes, will also generate higher passenger travel demand, much of which will have to be carried by the railways and water transport, but much will have to travel for short distances by bus and for longer distance by air. The development of air transport should be given more emphasis as an important element in the four modernizations process. 49. The Chinese railways are conscious of the implications of recent development policy changes and should be supported in their effort to expand and improve passenger services. This does not mean neglecting freight transport of bulk commodities, however. These will continue to grow, albeit at somewhat reduced rates. Regarding roads, it is unclear whether sufficient recognition has been given to the demand potential for road transport as a result of the policy changes, together with the need to change the mix of short distance traffic modes. A time-phased plan might usefully be developed to improve and pave roads with traffic in excess of some 300 vehicles/day and to widen the few major intercity links where traffic is already approaching 5,000 vehicles/day. 50. In view of the above conclusions, the mission makes the following recommendations regarding investments, institutional and managerial changes, and opportunities for foreign assistance and advice. For each of these topics, recommendations are arranged by modes, unless recommendations apply overall. More detailed discussions are in the modal chapters of the report. Recommendations for Investments 51. Railways. Over the long term, the phasing out of steam traction and its replacement by electric and diesel traction is to be expected. Many lines (possibly 10,000-15,000 km) are already at, or above, the economic threshold which would economically justify electrification, with its higher initial capital cost but lower operating cost than diesel. The cost of line electri- fication alone, i.e. catenary and substations, is between $100,000 and $150,000 equivalent per route-km of single track. The cost of signalling and telecommunications generally associated with electrification, and of civil works, will depend greatly on the system selected and the type of area traversed - mountains, plains, urban areas, etc. In typical cases these signalling and communications costs would roughly double the above figures for line electrification proper. Electrifying 10,000 km at $250,000/km would thus mean $2.5 billion equivalent. Electric locomotives (about $1 million equiv- alent each) would add roughly another $2 billion equivalent. It is clear that a time-phased plan must be developed to coordinate both line electrifi- cation, where this is justified, and the production of the needed amounts of modern, efficient locomotives suitable for particular operating conditions of the system. This motive power plan, as suggested earlier, should also include - 298 - a strategy for the use of diesel in the short and medium term as transition steps towards the ultimate electrification of large parts of the system. Diesel locomotives (3,000 hp) are estimated to cost about the same as electric locomotives, or about $1 million each. 52. Investments are urgently needed on rail passenger services including passenger stations, some line and signalling modifications, and the type of equipment that will give the railways more operating flexibility, particularly for short distance travel in the vicinity of large cities. 53. Some investments are also needed to improve transport and handling of coal and other bulk material to ensure rapid and efficient loading and unloading of cars, operation of through and block trains, etc. We are not in a position to estimate these on the basis of present information. The need for investments in technology are dealt with under opportunities for foreign assistance below. 54. Roads. Besides the continuous extension of the system at low rural road standards to areas presently not accessible by motor transport, there is a need to develop a time-phased plan for the improvement of, say, 1,500 km of existing two-lane roads with traffic volumes already in excess of 3,000 vehicles/day, and also to improve and pave another 80,000 km of unpaved roads on which traffic already exceeds 500 vehicle/days. Failure to pave these roads will cause vehicle operating costs, including energy consumption, to be far in excess of the costs of paving. To upgrade these roads could cost $100,000-150,000/km depending upon local conditions. Thus 80,000 km would mean $8-12 billion investment, in addition to expenditures for the 1,500 km of four-lane roads. Many bridges also need upgrading and replacement, and a time-phased program with priorities should be developed. Technological improvement to road vehicles are dealt with below. 55. Water Transport. The natural conditions of many of the rivers in China that do not already carry heavy traffic are extremely promising for transportation purposes; and already very large tonnages are carried on the rivers and canals, compared to the amounts of money that have been invested in improving and maintaining them, or in building ports and infrastructure. Investments at levels well above the tiny levels of the past would probably have high rates of return, particularly where entire river and port systems can be systematically upgraded without neglecting any crucial aspect. China has chosen as its top priority for the near future the development of the Xi Jiang to enable barges with loads of 1,000 tons to go back and forth between Guangzhou and Nanning. Meanwhile, the Huai He and the Grand Canal are also being improved in order to facilitate the shipment of bulk minerals such as coal and ore. 56. Because of the congestion and delays in some of China's leading ports, there is a clear need for substantial further investment directed principally into construction of terminal facilities, including equipment - 299 - for handling of containers and of bulk materials. There is also a need to emphasize the development of deep-water ports so as to take advantage of the economies associated with larger ships, as well as lower costs of dredging and port maintenance, compared to estuarial ports. These general points are already recognized in China, but medium- and long-term plans should be prepared carefully as soon as possible to increase the coherence of the investment program in this area. Recommendations Regarding Institutions and Management of the Sector 57. Although planning and coordination in the sector is weak, the general overall performance of the system has been good. This is largely because China started in 1950 at a very low level and many of the investment needs were fairly obvious. In any case, finely detailed transport planning and coordination is both impossible and undesirable in a country as vast and diverse as China. Attempts to do so would often result in delays, rigidities, low level of service, etc. 58. Nevertheless, improved planning and coordination is needed to ensure that best use is made of existing infrastructure and equipment and that more uniform criteria of economic evaluation, technical standards, designs and investment and timing are applied in project analysis work. Detailed suggestions are given in the concluding sections of each modal chapter of this Annex. 59. There are opportunities for coordination improvement at many points in the transport system but this is probably most evident in water transport and, to a lesser extent, in road transport, where multiple transshipments are currently very costly. It has to be recognized, however, that the large cast of actors in these subsectors makes physical coordination efforts difficult. Therefore, incentives and signals such as meaningful prices are needed to ensure the actors respond in rational ways, consistent with their assigned tasks. 60. The question of pricing deserves particular attention. To this end, the mission recommends costing studies in all modes to serve as a basis for examining opportunities for changes in the price structure in the system which would improve modal allocation and, in particular, shift short haul traffic from rail to road and further increase the role of water transport. Opportunities for Foreign Assistance and Advice 61. Technology. Application of modern transport technology in China has lagged behind development in the rest of the world in a number of areas and China would seem to need to catch up in: (a) locomotives - both electric and diesel; - 300 - (b) specialized rail passenger equipment for short distances; (c) trucks at both ends of the spectrum - small and heavy - and for the heavy trucks diesel rather than gasoline powered; (d) barges which can be ocean going and also travel inland, thus minimizing the need for transshipment and, possibly, ship- building; (e) engineering standards for roads, ports, and dredging works including modern hydraulic studies; (f) telecommunications, route navigational aids; (g) materials and bulk handling equipment linking transport modes; and (h) management information systems. Some technology such as that for vehicles can be acquired from abroad; in other cases, such as in engineering and management, it is more a matter of training and exposure through visits by Chinese engineers/economists abroad and by foreign experts to China. 62. Studies. Studies of the type that are commonly done by consulting firms in other countries will probably have to be carried out by research institutes in China with the assistance of foreign experts in specialized fields. A number of relevant studies are mentioned in the modal chapters. The most urgent ones appear to be those referred to in previous sections such as the use of coal, including its distribution and transport; the intermodal allocation of traffic, especially for short-hauls; the economic and social benefits of the secondary and tertiary road networks to provide greater access to areas not well served by modern transport; a motive power plan for the railways; and a master plan for ports, particularly for developing deep water ports away from river estuaries. 1. SECTOR DESCRIPTION AND TRENDS A. The System 1.01 Technologically, China's transport sector is a dual economy with traditional means such as pack animals, human porters, animal or laborer drawn or pushed carts, and wind powered sampans and junks existing in large numbers alongside a growing, modern transport system (see maps IBRD 15512R2 and 15528R2, located at the end of Volume II). Although these traditional forms are slow and expensive they are clearly important in short distance freigh movement, particularly in the densely areas of the mountains and border provinces animal (e.g., camel) transport is still used for longer hauls. The traditional sector is retreating, however, in the face of the growing amounts, wider geographical penetration and greater efficiency of capital intensive modern transport technology./l Nevertheless, traditional means remain a significant feature of the transport scene, not least because in mixed traffic situations they reduce the capacity potential of increasingly high cost modern infrastructure, vehicles and loading/unloading equipment. 1.02 The continued significance of traditional transport reflects capital scarcity in China generally but, more importantly, it follows from a deliberate national development policy of technological dualism or "walking on two legs," as it was officially termed. This dual policy has not been limited to the usual technology and factor proportions aspects in equipment choice and construction techniques resulting from an abundance of low wage labor. More broadly, China has concentrated much of its investment resources on the development of a modern, large-scale capital intensive industrial sector, with its surpluses being largely reinvested for continu- ing the growth of the modern sector itself and only a modest diversion of output to the rural sector. Expansion of the rural sector, therefore, has been based heavily on its own output and savings, after contributing to the growth of the modern sector. Small-scale industry was developed in the /1 Ta Chung Liu and Kung Chia Yeh, "Preliminary Estimate of the Chinese National Income.. .1952-59," American Economic Review, Vol. LI, May 1961, p. 40, suggest that in 1952 "old-fashioned transportation" accounted for 3.8% of China's net domestic product and "modern transportation and cotr- munications" for 2.9%. By 1957, they estimate the modern sector's share had grown to 4.0% and the traditional sector's had fallen to 2.5%, although its absolute contribution was about the same as in 1952. After an allowance of 1.0-1.5% for "communications," the total share of old and modern transport in both years is broadly consistent with the 5.0% or so contribution of transport to national product in many countries. The shift from old to modern transport has clearly continued, but no figures were available as to their relative importance today. Before 1947 it is reported that 70% of all inland and coastal traffic was moved by junks, but by 1979 junks carried less than 8% of the tons of goods carried. - 301 - - 302 - rural areas, using simple machinery, local labor and raw materials, to satisfy rural demands for some consumer goods and agricultural tools and equipment. The policy of dual development, reinforced by efforts aimed at regional and/or provincial autarky for wider national political and strategic reasons, required a matching transport system one part of which concentrated on meeting the needs of the heavy, modern industry and machine building sector and the other part on short distance rural distribution and production needs. The policy of dualism also required a new organizational instrument in the rural areas - the commune system. From 1958 onwards, the communes became very important not only for their well-known agricultural role but also for the construction of rural investment projects, including canals and roads, based on traditional labor intensive and simple transport technology. The communes have slowed the pace of change away from tradi- tional transport means by limiting the spending of the income surpluses from their production on motor vehicles, taking into account the need to find temporary or seasonal employment for labor. 1.03 In the modern sector a wide variety of improvements and additions have been made to the infrastructure, terminals, signalling and operating equipment subsystems of each of the different transport modes. These have permitted the growing transport demands - primarily of heavy industry and, only secondarily, of light industry, agriculture and passengers - to be met with greater efficiency and at lower unit resource costs. The improvements have helped to bring large numbers of Chinese people, particularly in the eastern half of the country, into the orbit of an exchange economy even though for many of them this is still very local in area and size. The improvements have also helped to move food from the ports to areas which, in the past, often suffered severe food shortages that were met, if at all, only by emergency famine relief measures. In practice, the emphasis of central government investment in modern transport has been concentrated on the railways, ports and the Chang Jiang to move the coal, coke, iron ore, steel, oil, cement and other inputs needed by heavy industry ("steel is the key" slogan) and the finished products and outputs used by large-scale development projects concentrated in a few key centers, and on satisfying military objectives./1 1.04 By contrast, the network of motorable roads which increased more than ten-fold from 80,000 km in 1949 to over 870,000 km in 1979 was mostly built by provincial, county, and commune governments./2 Design standards /1 Under these conditions, the performance or efficiency measures used by planners have taken the form more of physical capital productivity ratios (e.g. output per route-km of rail; tons per meter of port berth, etc.) rather than cost minimization/revenue surplus measures. /2 In comparison, India had about 1.2 million km of roads in 1976 (exclud- ing roads under forestry, irrigation, plantation and similar agency jurisdiction), of which only 29,000 km were classified as national highways and 98,000 as State highways, with the rest being low standard district and village roads. - 303 - have been generally low but they have permitted shifts to take place away from traditional transport to locally oriented tractor/jeep and robust small size general truck operations. The provincial capitals and other large towns have been connected by road with each other and with Beijing. These roads are also of modest design standards and do not permit fast, direct, heavy truck and bus movements. There is less than 200 km of four-lane intercity highways in China, though small additions are planned. In and around the periphery of major urban areas and larger ports, modern aircondi- tioned tourist type buses and large load carrying specialized trucks are beginning to appear, but still in small numbers. The number of motor vehicles is relatively small compared to other countries. There is no private automobile ownership, but cars are owned by government departments, enterprises and diplomats. 1.05 About 107,800 km of waterways are navigable. However, only 57,000 km have a usual water depth of one meter or more, and most of the rivers are still in their natural states with few port facilities, so that their potential is not yet fully used. Only 2,700 km of inland waterways are now navigable in vessels of 1,000 tons or more. Inland water transport accounted for 321 million tons of traffic in 1979, of which 46 million tons were moved by the Chang Jiang Shipping Authority; but the average haul was only 170 km, so that inland waterways only carried 5.5 billion ton-km or 10% as much as the railways. The largest, most developed, and most important waterway in China is the Chang Jiang, which, like the Rhine, Danube and Mississippi, is one of the world's great commercial arteries. In addition to local freight and passenger traffic, it carries ocean-going vessels of up to 10,000 dwt as far upriver as Nanjing, and in the seasons when the water is high, ships of 5,000 dwt can reach Wuhan. A vast array of other crafts, large and small, including some modern push-tow barge trains, are also used. The river has seven designated foreign trade ports, 25 terminals controlled by the central government, and many others that come under the jurisdiction of production enterprises, provincial and local level authorities. Along China's 18,000 km of coastline there are 15 ports engaged in foreign commerce that are under the control of the central government and handled 212 million tons in 1979, of which only one third were foreign trade cargoes. However, because of the longer distances involved (averaging 7,469 km), oceanic shipping accounted for 317 billion ton-km compared to 84 billion in coastal shipping (where the average was 1,232 km). At present there are 313 berths in coastal ports, of which about 130 berths are of 10,000 tons and above, with an actual handling capacity of 212 million tons (see Appendix E). Many berths are very congested, partly because of the shortage of berths and partly because of technically backward materials-handling equipment. Many more smaller ports are under provincial responsibility and participate only in domestic coastal trade. Large ports such as Shanghai, which is one of the largest ports in the world (80 million tons of cargo in both directions combined), handle vessels carrying containers, bulk-cargo and petroleum. - 304 - 1.06 In recent years, China's ocean and coastal shipping fleet has been expanding at a faster rate than that of any other nation. It now amounts to about 640 ships, totaling over 9.0 million dwt, making it about the fourteenth largest in the world. China is estimated to have committed over $1.0 billion on ship purchases from 1975 to 1979. Since then, a further $0.3 billion is estimated to have been spent on new and second-hand ship purchases. In addition, China has its own shipbuilding industry which produced 818,000 tons of steel ships for civilian use in 1980. In the process of improving its ports, rivers, canals and shipbuilding sites China has built up a dredger fleet, including auxiliary vessels, of over 500 vessels, with a total dredging capacity of about 100 million m3. Some of these dredgers are used on projects in other developing countries such as Malta, Mauritania, Burma and Tanzania. Reportedly, about $280 million has been invested in new dredgers in the 1975-78 period, but a part of this large dredging fleet is underutilized. 1.07 For a country of China's geographic size, population and per capita income level, domestic aviation is still underdeveloped. In 1978, for example, China had 40,000 domestic flights as compared with 85,000 in India. Passengers carried in China numbered 2.0 million and 4.7 million in India, although total passenger-km in China were approximately 50% of those in India because of larger average flight lengths. The difference in service fre- quency, however, is striking and can be seen in the number of flights per route-km - 1.7 in India and 0.3 in China (see Table 1.1). The aviation system is being upgraded, with capacity and service increased by the addition of jumbo (Boeing 747-SP) and other jet aircraft; by a greater number of city pairs being included in the domestic network of 150,000 route-km; and by more cities being opened to international services. Nevertheless, the CAAC has difficulty in keeping up with the growing demand, including that of an increasing tourist traffic from overseas. Table 1.1: DEVELOPMENT OF DOMESTIC AIR SERVICES - CHINA AND INDIA (i) Traffic Passengers carried Passenger-km No. of flights China India China India China India -- (-000) --- - (million) - --- (-000) --- 1978 2,000 4,752 2,790 3,685 40 85 1979 - 5,088 3,500 4,011 - 80 1980 - - 4,000 - - - - 305 - (ii) Route Structure Average flight length Flight density Kilometers Hours Flights per route-km /a China India China India China India 1978 800 510 - 1.2 0.3 1.8 1979 - 520 - 1.3 0.3 1.7 1980 - - - - - - /a Route length 1979: China - 160,000 km India - 46,000 km Source: Indian and flight length data from the International Civil Aviation Organization. Other chinese statistics from the State Economic Commission and State Statistical Bureau communiques on plan fulfillment in 1978, 1979 and 1980. 1.08 The railways in China are the major carrier in the modern transport sector. Their development illustrates well the progress since 1949. The rail system has more than doubled in size over the last 30 years from 22,000 route-km to about 50,000 km, of which 6,000 km is continuous long- welded rail, and 8,000 km are double-tracked./l In 1949, about 50% of the lines then in existence were unusable because of war damage and neglect, more than 130 different types and weights of rail existed, and uniform axle loadings, through services, and the easy interchange of rolling stock were not possible. The locomotive fleet then comprised about 4,000 steam units of 110 different foreign built types. There were over 700 different kinds of freight wagons and passenger coaches in a fleet totalling 60,000 units. By 1979, other than for a small number of meter gauge lines near the Vietnam border, China had a technically uniform and integrated rail system. The fleet consisted of some 10,000 locomotives (78% steam; 20% diesel; and 2% electric), 260,000 freight cars and 15,000 passenger coaches. This fleet which since the 1950s has been largely Chinese built, carried slightly under 1.1 billion tons of freight (38% of which is coal) and 0.8 billion passengers for 559 billion ton-km and 121 billion passenger-km./2 China is /1 In 1854, the US had about 22,000 route-km of rail. The USSR had the same amount in 1878. India, which had about 53,000 km in 1950, now has slightly over 60,000 route-km. /2 In comparison, Indian Railways performed 163 billion ton-km and 177 billion passenger-km in 1978 and carried 210 million tons and over 2.0 billion passengers (excluding suburban commuter traffic). - 306 - the third largest rail freight transport country in the world, after the Soviet Union and the United States./1 While China's rail network is now the fifth longest in the world, it is still relatively modest in relation to the size of its population and productive area. The network, for example, is about 20% the size of that in the USA, 35% of the USSR's, and 20% smaller than India's. 1.09 In 1949, about 60% of the total 22,000 km of rail lines of differ- ent gauge and types were concentrated in the northeast and coastal regions, and the emphasis in railway investment in the early 1950s was on their rehabilitation - the tying together into a coherent standardized system, though important new lines such as Chengdu-Chongqing and Yingtan-Xiamen were completed. After the failure of the Great Leap Forward in 1960, attention shifted to the improvement of existing routes and repairs of rolling stock. Major capital construction was not resumed until the third Five-Year Plan (1966-70) commenced. The resulting surge of line construction lasted until 1974. The pattern of new rail construction reflects a mix of objectives. Rail penetration into Xinjiang, for example, seems to have been influenced by the search for petroleum; the needs of the nuclear sector for remote testing sites; a quest for greater national cohesiveness and regional income equalization by reaching out to areas populated by minority nationalities; and, initially, to link with the USSR system, though this was not completed. The process of extending and improving the rail network has involved major engineering achievements in tunnelling and bridge construction in difficult terrain, soil, river and climatic conditions by the construction units of the Ministry of Railways and the railway corps of the PLA./2 Large, productive areas such as the Sichuan, Yunnan and Guizhou provinces which were formerly isolated have been linked with other parts of the country. From 1978, however, a clear shift has taken place in rail investment policy away from new line construction to the renovation of older lines, including the double-tracking of major trunk lines, with total investment for this purpose roughly equal to that for new line building. This needed change in emphasis will ease a number of capacity constraints in key bottleneck sections. /1 The 1979 tonnage carried on the China's railways was equivalent to all the rail freight originating in West Germany, France, the UK, Spain, Switzerland, the Netherlands and Japan combined or that in Poland, Hungary, East Germany and Romania combined. /2 For example, the rail and bridge over the Chang Jiang at Nanjing; the 669 km Baoji-Chengdu line with 303 tunnels totaling 84 km and 994 bridges totaling 27 km; and the 901 km line from Xinjiang to Chongqing, 45% of which consists of bridges and tunnels. - 307 - 1.10 China has 30 cities with populations of over 1.0 million people, totaling 100 million people in all, making it one of the largest urbanized countries in the world. In these, and many smaller cities, the number of buses is growing but the bicycle remains the major means of transport. For example, over 2.5 million bicycles are registered in Beijing and the numbers are increasing by over 100,000 per year. Bicycle production in China exceeds 10 million units annually and there are over 100 million cycles in the country. The absence of private automobiles and the generally low level of motorization have restrained pressure to build highways with high design standards in order to ease the 'urban transport problem' (congested peak hours caused by journies to and from work), which is common in most industrialized countries and some large cities elsewhere in the developing world. 1.11 There are about 11,000 km of pipelines in China at present, of which 6,900 km were built in the last decade. This system, which has involved some Y 2.25 billion in expenditures, has eased the burden of oil traffic movement for the railway somewhat, but there are irrationalities in the distribution of refineries./l 1.12 In summary, there has been obvious tremendous physical progress since 1949 in extending and improving the transport network and increasing equipment capacity. After the break with the Soviet Union, this was done without foreign assistance, though selected amounts and types of foreign equipment were imported on 'commercial' terms and, in some cases, copied and improved upon for use in local conditions. B. Trends in Transport Performance Historical Growth 1.13 The total annual tonnage of freight carried by the various transport means in China is now probably over 2.4 billion tons. This is about 60% more than that carried in 1970 (1.5 billion tons) and some 3 times the volume moved in 1957 (0.8 billion tons). Total ton-km performed in 1979 were 1,042 billion or 5.75 times greater than the 181 billion ton-km in 1957 and 2.3 times greater than the 460 billion ton-km in 1970. New data for 1980 (with a slightly wider coverage) show that of a total of 1,202.6 bil- lion ton-km (up 5.6% over 1979), 47.5% was produced by rail, 42% by water, /1 Described recently in a Chinese internal document of the Chinese Trans- port Economics Research Commission as "too many in the northeast, too close along the Chang Jiang, too few in the southwest and too big near Beijing." One result is that "seven million tons of finished petroleum products from the northeast pass through Shanghai, and on the Chang Jiang crude and finished products pass by one another in a steady stream." - 308 - 6.4% by road and 4.1% by pipeline./1 Chinese transport statistics, however, are not without problems. For example, most published figures for road transport relate only to traffic "handled by transport departments," i.e., specialized transport trucking and bus organizations. They exclude, there- fore, two important groups of road transport: that by traditional means which, in industrialized countries, at least, would go by road vehicle, and the work of vehicles owned by ministries, agencies, enterprises and communes. While this latter group of vehicles accounts for the bulk of the fleet, many of them are small pickup minibus types and are not comparable to trucks with carrying capacity four tons and above and standard size buses owned by the specialized transport departments; and they are said to carry much less traffic in total than the fleets of the specialized transport departments. Passenger statistics exclude urban bus service and longdistance passenger traffic to and from Shanghai and Tianjin. The water transport statistics include ocean shipping transport in Chinese-owned ships. International comparisons, therefore, are difficult and, at best, risky. 1.14 Scattered evidence suggests that rapid growth took place in transport output between 1952 and 1957, with the railways then accounting for about 75% of total freight ton-km and some 65% of the tonnages carried. A first peak in transport performance was reached in 1959; then, after declining to a low point in 1961 as a result of economic slowdowns of the Great Leap Forward period, a recovery began up to 1966, only to decline again in the late 1960s due to the disruptions of the Cultural Revolution. From 1970 onwards, however, there seems to have been a fairly steady average rate of growth in total transport output at around 9% p.a. /1 The communique on the results of the 1980 plan as released by Xinhua News Agency on April 30, 1981, show 1,202.6 billion ton-km of freight volume (up 5.6%) including 571.1 billion from railroads (up 2.1%), 505.3 billion from water transport (up 10.7%), 76.4 billion from roads (up 2.6%), 49.1 billion from pipelines (up 3.2%), and 0.1406 billion from air freight (up 13.9%). Some of these figures are evidently on a different basis from those of previous years (cf. Table 1.2). Passenger transport totalled 228.1 billion person-km (up 15.8%) of which rail accounted for 138.3 bil- lion (up 13.7%), waterways 12.9 billion (up 13.2%), roads 72.9 billion (up 20.9%), and air 4.0 billion (up 14.3%). Cargo handled by major sea ports was 217.31 million tons (up 2.2%). The implied numbers for 1979, together with available data on water transport volumes (Table 5.1), imply that with oceanic shipping excluded, railways carried 68.1% of the freight volume, coastal shipping 10.3%, roads 9.1%, inland waterways 6.6% and pipelines 5.8%. - 309 - Table 1.2: CHINA - GROWTH OF FREIGHT AND PASSENGER TRAFFIC Ton-km (billion) Passenger-km (billion) Rail Road Water Total Rail Road/a Water Air Total 1952 60.2 1.4 14.6 76.2 20.1 2.3 2.5 .02 26.9 1957 134.6 4.8 41.6 181.0 36.1 8.8 4.6 .08 49.6 1977 455.7 25.1 276.2 757.0 102.0 44.8 9.8 1.8 158.4 1978 533.3 27.4 377.9 938.6 109.1 52.1 10.1 2.8 174.1 1979 558.8 26.8 456.4 1,042.0 121.4 60.3 11.4 3.5 196.6 /a The figures relate to the output of Transport Departments only, i.e. they exclude both the work done by ministry, enterprise, and commune-owned vehicles and vessels as well as the substantial short-haul road traffic by multipurpose tractors. Source: State Statistical Bureau, "Main indicators: Development of the National Economy of the People's Republic of China," Beijing, May 1980. Transport and Economic Development 1.15 The transport sector's contribution to economic development can be measured in part by comparing transport growth rates with those of the output of the total economy and its main sectors. The figures in Table 1.3 suggest that in China, as in other developing countries at the lower end of the per capita income scale, freight transport output since 1957 has been increasing faster than total output - about 6.5% p.a. (footnote /b, Table 1.3) as compared with about 5% p.a., or an elasticity ratio of around 1.3, i.e., a 10% rise in national income is associated with a 13% increase in freight traffic. The growth in traffic reflects the marked structural emphasis on heavy industry which required bulk movements of such goods as coal, cement, steel and construction materials over distances averaging around 435 km in 1979, nearly double the average (about 225 km) in 1957. The relationship of freight growth to GNP growth is less than that experienced by other countries in similar phases of development and reflects in part the development policy involving limited interregional trade in foodstuffs and consumer goods. In India, freight traffic grew twice as fast as national income for the first two decades after Independence, though the growth rate has tapered off in the last decade, with freight traffic now rising at about the same rate as national income. The rate of increase in passenger traffic in China (6.5% p.a.) has been marginally above that of national income. On the railways - the dominant carrier and for which transport statistics are the most reliable - the average annual rate of growth in passenger traffic since 1957 has been around 5.5% p.a. By contrast, in India rail and road passenger traffic grew at an average rate of 5.5% p.a. during the period 1950-70 and at over 8.0% p.a. in the 1970s. The following figures also suggest a rapid growth in passenger traffic by road, but the exclusions in coverage (para. 1.13 and footnote to Table 1.2) make this series problematical. - 310 - Table 1.3: CHINA - ECONOMIC AND TRAFFIC INDICATORS (1957-79) % p.a. % p.a. increase/a increase/a 1957 1977 1978 1979 1957-79 1977-79 National Income 100 267 299 320 5.5 10.0 Agriculture Gross output value 100 169 185 200 3.5 9.0 Industry Gross output value 100 616 698 775 9.5 12.0 Light industry 100 403 446 499 7.5 11.0 Heavy industry 100 553 639 688 9.0 11.5 Freight transport (ton-km) 100 438 541 601 8.5 /b 17.5 Rail 100 339 397 416 6.5 10.5 Road /c 100 524 572 560 8.0 3.5 Water 100 666 911 1,100 11.5 29.0 Passenger-km 100 317 349 394 6.5 11.0 Rail 100 282 302 336 5.5 9.5 Road /c 100 508 591 703 9.0 17.5 Water 100 211 217 246 4.0 8.0 Port traffic 100 421 532 570 8.0 16.5 Population 100 146 149 151 1.9 1.7 /a Rounded to the nearest 0.5%, except for population. /b We believe this figure slightly overstates the internal freight movement because the water transport figure includes ocean shipping by some Chinese-owned vessels. Based on partial information on coastal and ocean shipping we estimate that total freight transport (ton-km) increased at about 6.5% p.a. between 1957 and 1979. This figure is used in para. 1.15. /c The mission assumes the figures relate to the output of Transport Departments only, i.e. they exclude both the work done by enterprise and commune-owned trucks or buses and the substantial short-haul traffic on the roads done by multipurpose tractors. Source: Derived from State Statistical Bureau, "Main Indicators", Beijing, 1980. - 311 - Table 1.4: CHINA - MODAL DISTRIBUTION OF TRAFFIC (%) 1952 1957 1977 1978 1979 1. Freight-km Rail 79.0 74.4 57.3 54.4 51.3 Road /a 1.8 2.7 3.2 2.8 2.5 Water 19.2 23.0 34.7 38.5 41.9 Pipeline - - 4.9 4.3 4.4 Total 100.0 100.0 100.0 100.0 100.0 2. Passenger-km Rail 81.0 72.8 64.4 62.7 61.7 Road /a 9.1 17.7 28.3 29.9 30.7 Water 9.9 9.4 6.2 5.8 5.8 Air - - 1.2 1.6 1.8 Total 100.0 100.0 100.0 100.0 100.0 /a By transport departments only - therefore understates the traffic volume moving on the roads in that it omits the output of vehicles owned by enterprises, ministries and communes as well as by traditional transport means. New numbers for 1980 (footnote, para. 1.13) imply a share of 6.4% for road transport in 1980 and 6.5% in 1979. Source: From State Statistical Bureau, "Main Indicators", Beijing, 1980. Performance 1.16 There are, no doubt, many efficiency indicator series available to the Chinese authorities which give them a picture of the performance of the transport sector. These have not been published, however. Scattered evidence, however, suggests that on the railways, for example, freight traffic increased from under an average of 2.0 million ton-km per route-km in the early 1950s to over 6.0 million ton-km in 1960, with a plateau through the 1960s and then a rise to over 10.0 million ton-km recently (Table 1.5). As early as 1959 the heavily travelled line between Shenyang and Wuhan was reported to have traffic densities in different sections of 25-35 million ton-km per route-km. - 312 - Table 1.5: DENSITY OF TRAFFIC PER ROUTE-KM (Rough comparison) Passenger-km per Net ton-km per route-km p.a. route-km p.a. China India/a China India/a - (--( 000) ----- (000) 1950 590 1,765 1,750 1,502 1960 n.a. 2,027 6,909 2,764 1970 n.a. 2,876 6,780 3,611 1977 2,060 3,674 9,206 4,358 1978 2,165 4,377 10,580 4,547 1979 2,357 10,850 /a Relates to broad gauge system only which though only 51% of total route length accounts for 86% of freight ton-km and 76% of passenger-km. Source: Report of the National Transport Policy Committee, New Delhi, May 1980, P. 139. Future 1.17 No forecasts of future traffic growth were available. A 5% p.a. increase in national freight traffic growth during the 1980s would mean a total tonnage of around 4.0 billion to be moved in 1990. If it is assumed that two-fifths of the increment would go by rail, the increase would be equivalent to another 60 million tons or so of traffic per year. For passenger traffic, railway authorities forecast a 6% annual growth to 1985. This would add 300 million passengers a year to the system and require substantial investments in equipment as well as in lines and stations. Experience in many other countries show that future rail passenger traffic is often underestimated, even where road transport plays a larger role than in China. In China, the level of passenger traffic has been so far determined more by the capacity provided by the railways than by the actual travel demand; and priority has been given to freight traffic. The investment required reinforces attention to the points made in the next chapter about the role of the different modes (modal split), short-haul freight and passenger traffic, transport pricing, planning, training and energy issues. - 313 - 2. PAST DEVELOPMENT STRATEGY AND CURRENT ISSUES A. Transport Development Strategy and the Modes 2.01 The pattern of transport development and the roles played by the different transport modes in China are the outcome of firm, politically determined, basic policies relating to national self-sufficiency, dispersed development, primacy of heavy industry, public ownership and decentralized decision making, as well as defense strategy considerations. Different national policies would have meant different political and planning decisions about the size, modal distribution and location of transport sector invest- ments, and would have produced different organizational, technological and operational responses in the sector. A number of other factors, however, also condition some of the problems facing the transport sector and its ability to respond to the desired policy objectives. This section looks briefly at the effects of these basic national policies and the other factors. It concludes that the shift in national economic policies now being attempted has important implications for investment allocations within the sector as well as for the agencies engaged in transport administration and operations, if they are to contribute to achievement of the new economic policies. Self-Sufficiency, Dispersed Development and Industry Primacy 2.02 For the first 20 years or so after 1949, China's trading ties with the West were largely cut. Initially, China oriented its trade to the USSR and Eastern Europe, but seaborne trade between them and China was small. Thus, ocean shipping and port development were given low priority. Conversely, up to 1960 rail links between the Soviet and Chinese railway systems were strengthened by line improvements and by the transfer from the USSR of over 1,000 steam locomotives that were made redundant as it dieselized its system. 2.03 The main tasks facing Chinese policy makers in the early 1950s, therefore, related not so much to foreign trade as to reconstructing and rehabilitating the railways; integrating the country politically and administratively; and moving the center of gravity of industrial location away from the coastal areas for economic and strategic reasons, one consequence of which was to limit the significance of coastal shipping. Accordingly, the first and second Five-Year Plan (FYP) periods saw some new rail transport lines being constructed but much attention given to improving and expanding the other modes. Investment in transport and communications is reported to have accounted for 16.4% of all national investments in the first FYP period. This is fairly typical of experience in other developing countries, but at the lower end of the 12-30% range. The ratio of funds - 314 - invested in new rail line construction to old line improvement was only 1.3:1.0 whereas in the subsequent periods covered by the third and fourth FYPs a major shift in investment took place towards new rail line construction, with the 'new to old ratio' rising to 6.0:1.0 and about 80% of the new construction being located west of a line from Beijing to Guangzhou. 2.04 Many of these new lines aimed at unlocking the potential mineral (including coal) and other national resource sites. Initially, it seems, heavy industry was to move closer to such fuel and materials, thereby reducing transportation costs. Some observers have noted that because of wartime and prewar experience, there were strategic aspects in the initial shift of industry westwards to sheltered regions, but by the late 1950s/early 1960s this strategic emphasis was being reduced and many bulk materials and much fuel began flowing to the older established industrial centers. During and immediately after the Great Leap Forward, some emphasis was given in industrial policy to smaller scale, more scattered producing units for regional income distribution and quasi-autarkic economic reasons. This shift towards a regional self-sufficient "cellular economy," as it has been called, reduced transportation demands for agricultural, light industry, and consumer goods transport, but generated both inter- and intra-regional traffic in bulk inputs needed by heavy industry, and major construction projects required some rail and road construction. 2.05 Chinese development policy emphasized the rapid development of heavy industry. The transport effect meant giving priority to industrial freight rather than to passenger traffic, except for transporting workers to and from work and to assist in migration to and the administration of the peripheral areas of China. Restrictions of population movements and limitations on urban population size limited the migration from rural areas so characteristic of many other countries and also meant it was possible to relegate passenger transport to a secondary emphasis. 2.06 After 1961, policy shifted and increased attention was given to agriculture. Thus rural transport fared better and many roads were built by local initiative to low standards. Such local efforts at road building, however, are hampered by many physical problems. On the North China Plain, for example, drainage is generally poor, floods damage roads and wash out bridges; in the loess territory erosion is a major problem; on the Huang He plain, local road building materials are scarce; in the extreme north, con- struction and maintenance is difficult because of the problems created by alternating freezing and thawing of the earth which breaks up roads; and in the narrow valleys of South China, rice paddy land is at a premium, so little land can be spared for roads. 2.07 With the rapid development of external trade in the 1970s, ocean shipping and ports were given higher priority, and coastal trade also grew rapidly; one manifestation of this policy was the rapid acquisition of ocean- going vessels. However, until recently, the continued emphasis in the - 315 - economy as a whole was on heavy industry. This has meant that rail freight traffic is dominated by a small group of 6 commodities centered on mineral ores, construction and industrial raw materials, and coal and petroleum which, in total, account for three quarters of the traffic and move in full and multiple carloads. The output of light industry, agricultural processed products, and consumer goods are not a significant share of rail traffic, other than in some short-haul traffic. They do not create the type of loading/unloading and equipment problems faced by railways in other countries where they may be an important share of rail traffic. The modest growth until recently of light industry and agriculture in China and the recent timing of China-s development thrust have meant that the railway networks, unlike many of those in other countries, are not burdened with numerous short distance, light density traffic lines similar to those built elsewhere in the late 19th/early 20th centuries. The focus on heavy industry has worked in favor of rail transport technologically and against road transport, as can be seen in the railways higher research efforts and the outmoded standards of truck manufacture as well as low road design standards. Among the consequences of the rail emphasis is that China, somewhat like India, has not had to face road-vs-rail issues that plague other countries such as allegations of 'unfair competition,' low road user-charges, overloading in long-haul road transport, and wasteful subsidies to the railways. 2.08 Chinese transport experience also reflects basic decisions that had to be taken in the 1950s when the technological options that are now more generally available were not at hand. That is, in the 1950s steam locomotives were a quick, cheap and easy way of getting the economy moving and over 1,000 were made available by the USSR. Trucking was not a significant option since, given the USSR's limited trucking base, this would have meant importing fuel and vehicles from the market economies, which was politically impossible. It was clear to Chinese decision makers that for the long-haul movement of large volumes of minerals, fuels (particularly coal) and other industrial raw materials, the railways were the only viable alternative, supplemented by water transport on a limited number of routes. This emphasis on the railway, which has made a tremendous contribution to Chinese economic development, may, however, have introduced rigidities into transport thinking and, as a result, the potential of road and water transport may be inadequately assessed in decision making and project analysis. 2.09 The great rivers flow west and east and fail to provide direct links between north and south China. Coastal shipping could provide such a link, but, for a variety of reasons already noted, was not given until very recently a priority commensurate with its potential. Now, however, in a changed world political environment, it would appear to offer significant potential for expansion and energy savings. Many parts of south and central China have abundant water for rivers and canals which can be used for transport. Lack of usable water in the central deserts and plateaus, however, impeded the spread of steam locomotives, but now diesel and electric power - 316 - have increased the development option. Other conditioning factors on the transport system relate to the location of cities and demographic trends. The great cities of eastern China grew up at natural defensive sites, the intersections of main trade routes and at transshipment points, especially at ports some distance up river from the open coast but where depths of water are normally not sufficient for large modern vessels and require substantial capital and maintenance dredging. A major policy decision is needed to move future port expansion to deeper water sites. 2.10 Looking to the future it appears: (a) traffic is likely to continue increasing at a significant rate; (b) a lead time of five years or so will be needed to provide addi- tional capacity to some important terminals and on key line sections; (c) since transport infrastructure development takes time - five years or so for a major rail line and two to three years to transform an important old line - increasing the role of short haul road transport may be a quicker, lower cost alternative to rail improvement in some cases and would relieve some pressure on the system; (d) improvement of the transport network should be concentrated in the coastal regions with the emphasis being on types of facilities and equipment that would contribute to flexibility. The land area of the northeast, north, east and south central regions is less than 50% of that of the whole country, but 75% of the population live there and 80% of industrial production takes place in the area. It accounts for 80% of rail transport volumes and 87% of that by water and highway. A small number of trunk rail lines such as those from Beijing to Shenyang, Tianjin, Baotou, Guangzhou and Shanghai to Hangzhou and Tianjin, etc. carries 70% of industrial goods. Eight out of 15 main ports handle 95% of foreign trade. The transport installation in the region, therefore, deserves the focus of attention; (e) north-south transport is generally stronger in eastern China, north of the Chang Jiang, than that in the east-west direction because of the past attention given to it by building new lines, double tracking others, and the recent increase in coastal fleet capacity. By contrast, the large volumes of bulk commodities such as coal, lumber, and petroleum move from east central China to the ports by single track rail lines and the Chang Jiang with its limited equipment capacity. The effort being made to provide more capacity for this traffic seems appropriate; - 317 - (f) more railroad cars, some major marshalling yards, and more diesel and electric locomotives will be required, but decisions need to be preceded by careful economic evaluation and consideration of alternatives; (g) the potential for further expanding water transport justifies carefully phased improvements in ports and inland waterways, along the lines recently begun; and (h) in both passenger and freight short-haul traffic, road transport can play a greater role, as discussed elsewhere in this chapter, if the motor fuel problems can be resolved. B. The Transport Policy and Planning Framework 2.11 In a broad sense, transport policy and planning involves (a) deter- mining the volume and composition of future traffic; (b) formulating guide- lines and measures which will result in traffic being distributed among the various modes in a way that minimizes total social costs; (c) establishing rules that will guide transport agencies proposing investment decisions; and (d) developing supervisory and feedback mechanisms to ensure that plans, programs and projects are carried out in a manner consistent with policy objectives. Many agencies are apparently involved in the transport policy and planning process. At the national level, transport is administered by the Ministry of Railways (MOR); the Ministry of Communications (MOC) covering roads, main ports, coastal and ocean shipping and some inland water transport; the Ministry of Petroleum (MOP) for pipelines; and the Civil Aviation Adminis- tration of China (CAAC), a special agency of the State Council. Decision making in the railways, pipelines and aviation is highly centralized, but in the roads and water transport subsectors the role of provincial, county and commune governments and enterprises is very important. Transport decisions, therefore, have to be coordinated horizontally at the central level among the major government ministries and agencies, and vertically between the central ministries and the provinces and lower levels of government. 2.12 Horizontal coordination seems to take the form mainly through the approval and scheduling of investment plans by the State Planning Commission (SPC) and the State Economic Commission (SEC), with the State Capital Construction Commission (SCCC) influencing the process by its participation in the project design and implementation scheduling plans for major projects. In principle, the SPC perspective is longer and medium-term while the SEC deals with annual plans and budgets needed to carry out the SPC's plans, within the current year's resource constraints. In practice, there seems to be some blurring of these roles. 2.13 The SPC and SEC each have Transportation Bureaus made up of four divisions - railways, communications (i.e. road and water transport), tele- communications and general administration. The staff of each bureau is - 318 - reported to consist of engineers, financial analysts, economists and admin- istrators. Given, however, both the limited staff numbers - 25 in SPC (22 positions filled) and 30 in SEC - and the wide area of their responsibilities, the amount and depth of analytical and policy work conducted by these bureaus, at best, can be limited and somewhat superficial. They rely largely on work done by the operating ministries and agencies (MOC, MOR, MOP; CAAC) because they are not equipped to undertake independent investigations. The recent re-establishment of the Institute of Comprehensive Transportation within the SEC, however, is a significant step towards getting an overall picture of transport developments and analyzing problems from a sectoral rather than a limited modal viewpoint. This venture should be encouraged by giving it the staff and other resources needed to undertake, among other things, the following functions: (a) to survey from time to time actual traffic patterns and real transport costs in the different modes; (b) to analyze the factors influencing trends in transport demand; (c) to examine the transport price structure for freight and passenger traffic in each of the modes in relation to their costs; (d) to study the effects of fiscal policies and subsidies at the central and provincial government levels to see what, if any, distortions in resource allocation are taking place and what objectives are being achieved; (e) to monitor the functioning of the transport system in order to identify promptly impending problems or major imbalances (contradictions) between demand and supply; (f) to suggest appropriate policy principles and prescriptions for the sector to help it achieve national objectives; and (g) to establish cost-benefit appraisal techniques for use by the operating agencies and ministries and in cooperation with their planning units. 2.14 Information on much of the above seems now either scanty, or not available to or productively used by the SPC/SEC in their formulation of transport plans. Investment "trade-offs" resulting from changing price and other policies to influence transport demand volumes and shifts of traffic among the modes do not appear to be part of the SPC/SEC planning process, not least since it is unclear whether there is a coordinated relationship between the SPC/SEC and the State Price Bureau and between centrally and provincially determined transport prices. 2.15 Whatever broad planning and coordination is done at the central level for the transport sector appears to be the outcome of meetings set up by the SPC/SEC, at which the responsible ministry, other interested minis- tries and affected large enterprises attend. If foreign trade and equipment procurement from abroad is important in a project proposal, the Foreign Trade Ministry participates. Decisions seem to be taken by consensus rather than on the basis of established rules relating to minimum acceptable rates of return on investment or uniform methodological criteria of economic evalua- tion, technical standards and project timing. Whether there is rigorous analysis and cross-examination of project proposals to see what the invest- ment would do for the finances and operating efficiency of the requesting agencies is not known. The mission is unaware of any formal or informal national transport plan. The ministries have lists of desired projects, but how far these had been prepared and evaluated and the objectives they are to serve is unclear. No typical pre-investment studies were made available. - 319 - 2.16 For equipment planning purposes it is possible that at the broad aggregate level planning coefficients are used to arrive at the capacity required to meet transport demand, after decisions have been taken about the national production levels for key products, e.g. it is reported that on the railway: ... every 100 million yuan of overall agricultural and industrial output produces approximately 200,000 tons of traffic ... every 100 million tons of coal produces about 70 million tons of traffic; every 100 million kilowatt hours of electricity produces 50,000 tons of traffic; every 10,000 tons of crude oil produces 5,000-6,000 tons of traffic; and every 10 million tons of steel output generated approximately 60 million tons of traffic ... and each 100 million ton increase in transport volume on the railway required 1,000 locomotives and 20,000 cars."/l 2.17 A need for improved coordination at the operating level seems to exist also. There is what appears to be unnecessary transshipment of cargo in the road and water modes and unnecessarily circuitous journeys. In the latter case, for example, ocean, coastal and inland water transport movements are undertaken by a variety of administratively separate units (including production enterprises), each concerned with meeting planned physical production targets rather than minimizing the total distribution costs of traffic flows. As a result there has been a tendency to over-invest in some types of equipment and to get low utilization from it so that it is available on demand. 2.18 While substantial progress has been achieved in the transport sector, many Chinese officials feel that much remains to be done as indicated in the following quotation: "In order to raise investment results, we must start at 'the head of the dragon', strengthening research, determining the importance and urgency of transport needs, weighing invest- ment results, fixing scientific transport industry develop- ment plans and yearly investment plans; investment projects projects must be correctly determined, and the capital con- struction front shortened; capital construction management methods and the management system must be reorganized and improved, and the contract system restored; the banks must be utilized to strengthen investment management and super- vision; economic effectiveness indices must be used to check capital construction work. In short, the results of invest- ment in communications and transport must be raised, communi- cations construction must be quickly and economically carried carried out, and the attitude of competing for investments and projects without regard for economic results must be overcome."/2 /1 "Some Questions Regarding China's Development of Communications and Transport," Yang Hongnian and Wang Derong, Comprehensive Transport Research Institute, Beijing, Jan. 1980. [Unpublished, in Chinese] /2 Ibid. - 320 - 2.19 There can be no dissent from such sentiments, but each of the points raised needs to be examined in China to assess the causes, costs and remedies available. C. Transport Pricing 2.20 As in other sectors of China, prices in the transport sector are set by administrative orders emanating from the relevant State, Ministerial, Provincial or local authority levels. Once set, prices tend to remain fixed for long periods of time. The railway tariff, for example, has been largely unchanged for 15 years. Price stability has administrative convenience for both planners and the public, but with the passage of time transport tariffs get increasingly out of line with the operating costs they are supposed to reflect, including the real cost of capital being made available to transport enterprises by the government. The social costs of environmental damage by transport (e.g. pollution of ports and rivers) are not communicated to transport planners and managers by either price or nonprice signals. 2.21 The growing concern of planners and decision makers in China about the need for pricing rationality and flexibility is being felt in the trans- port sector. For example, at a "National Academic Forum on Pricing Policy for Truck Transport and Short-Haul Rail Transport" held in October 1980,/1 it was unanimously agreed that: (a) in truck transport the "one price fits all" policy (i.e. average cost method) ignores differences in "road conditions, types of goods, distances, difficulties in loading and unloading; it flies in the face of the law of value and does not foster transport industry management or the flow of goods;" (b) short-haul rail transport prices are below costs and the railroads lose Y 60 million a year on short-haul transport of under 50 km; /l Represented at the forum were: the Comprehensive Transport Research Institute of the State Economic Commission, the State Pricing Bureau, the Finance and Trade Economic Research Institute of the Chinese Academy of Social Sciences, Chinese People's University, the Planning Office of the Coal Department, the Research Planning Offices of the Communications and Railway Departments of the Sichuan Economic Committee, 27 provinces, municipalities, autonomous regions (in the form of their communications departments or offices), and the railroad offices of Jinan, Shenyang, Chengdu and Shanghai. Seventeen papers were presented and discussed at the forum. Quotations are from the summary minutes of the meeting (translated). - 321 - (c) the price ratios between road and rail distort the division of traffic between the modes (and favor rail); (d) preferential truck transport prices aimed at supporting agriculture and special rail prices for agricultural machinery are below costs and because, in practice, "farmers are seldom benefitted by preferential prices, these low profit/high-loss prices should be quickly eliminated;" and (e) before truck transport prices are set in a reform program for 1982 transport prices, "a floating price system may be used." 2.22 The mission subscribes to these conclusions and the perceived need for more rational transport pricing. There is significant regional, and possibly commodity, cross-subsidization within the railway. Modal distortions take place, e.g. short-haul traffic that moves by rail which could move more economically by road or water transport. In the ports, greater price incentives are needed to clear both ships and cargo quickly and thus reduce congestion. There is some evidence that high trucking prices charged by the transport corporations for very short haul traffic have the effect of encouraging traditional transport which, paradoxically, adds to traffic congestion and causes higher social costs for modern transport. Some of the transport pricing practices may have regional income distribution objectives; it is questionable, however, whether they are the most socially effective way of achieving the objective. 2.23 Greater market signalling and managerial incentive roles for transport prices such as being advocated within China will also necessitate better understanding of transport costs for different modes, routes, commodities, seasons, terrain and so on. Transport agencies in China could apparently benefit substantially from the analytical basis of cost-finding procedures and techniques which have been developed elsewhere in recent years. The mission believes that work should begin soon on a study of railway costing. A joint effort by Chinese experts and those from, say, a couple of foreign railways that have recently reformed their costing procedures could be a particularly valuable way of transmitting knowledge of modern analytical techniques of financial and economic costing. D. Short-Haul Freight Transport 2.24 The increase in traffic in recent years put such pressure on the China railway system that capacity was severely strained on some major trunk lines, particularly those in and around industrial centers or rail hubs. According to one Chinese source, the system-wide average for freight carried by rail less than 100 km is about 23-30% of the total tonnage carried and, of this, 13-19% is moved 50 km or less, and 5-10% moves 20 km or less. In - 322 - large city hubs the proportions are even higher. In 1979, for example, 21% of the freight carried by the Beijing Railway Administration moved 50 km or less and 34% less than 100 km. The large amounts of short-haul freight accom- panied by a widespread use of industrial sidings (specialized rail lines) as part of the industrial development process, have led to increased numbers of partially loaded train movements; decreases in the distance between sta- tions; increases in the number of marshalling and freight yards; declines in daily car output; and increases in transport costs (including the social costs of congestion to road traffic caused by limited numbers of road-over-rail bridges in urban areas). 2.25 The distance below which road transport is economically superior to rail transport is not a single figure of worldwide application. It will depend, among other things, on the commodities and volumes to be transported; on the size and type of vehicles and the price and type of fuel they use; on road conditions; on the extent of trade and road circuity between terminal points; on the amount of cargo transshipments. Transport costs by rail may prove to be cheaper per distance unit, but customers use road transport because of its lower cargo loss ratios, the reduced packaging costs involved, and the time savings from 'door-to-door delivery, instant availability of transport and quicker transit times. For example, it has been reported that rail transport from Beijing's eastern suburbs to Tianjin's new harbor takes about 30 hours (including pick-up and delivery, marshalling, transport, sta- tion operations) as compared with 5-6 hours by truck. As another example, transporting coal to Beijing East suburban station from Mentougou requires 30 hours by rail, but only 4-5 hours by truck. Generally, there is an overall lack of mechanized loading/unloading for coal which increases materially both transport costs and delivery times. The quicker turnover of goods and capital when road transport is used is economically very significant, particularly if realistic interest rates are charged for working and invest- ment capital - which they are not in China. Rail transport is technically less fuel intensive than road transport, but whether, in practice, it actually is depends upon the circumstances of particular places, load factors and operations which need to be examined on a specific basis rather than through the use of nationwide average coefficients which, themselves, relate only to the line haul component in the total distribution process and exclude the energy involved in building track, vehicles, terminals, etc. and maintaining them. Analysis undertaken in China suggests that up to distances shown below road transport is more advantageous than rail, e.g. up to 50 km, the ton-km cost by a 7 ton truck-trailer is lower than for a full rail car load. - 323 - ESTIMATED ECONOMICAL DISTANCE FOR TRUCK TRANSPORT (km) Full car load Partial car loads 4-ton truck - 70 7-ton truck-trailer 50 110 13-ton truck-trailer 70-110 220 While the accuracy of these calculations may need further testing, the metho- dology employed appears acceptable, and, by implication, so is the conclusion that there is a potentially large role for road transport in short-haul traffic. This question should be closely examined, however, with the particular aim of removing from the railway general cargo that moves in less than train loads for under 50 km and less than carload (LCL) lots for under 100 km./l Construction of sidings should also be carefully surveyed and studied to assess their social and environmental impact on the urban environment. As discussed elsewhere in this chapter, the vehicle manufac- turing, road construction and fuel production and distribution implications of the expanding need for short-haul road transport must be faced squarely, particularly in the light of the large rail investment that would otherwise be required. E. Passenger Transport 2.26 Passenger traffic has expanded greatly in China since 1949, reflect- ing increased population, urbanization and personal income. Road, rail and water passenger transport facilities and services have been improved so that, in general, the public transport system has managed to supply China's growing population with its approved travel requirements. Nevertheless, complaints are common about overcrowding, poor services, inconvenient ticketing arrange- ments, lack of suitable waiting facilities, and slow journeys. From press reports there is a "passenger problem" in both rural and urban areas. /l Reportedly, the 10th Five-Year Plan in the USSR provides for the closing down of any rail transport under 50 km and under 200 km for perishables and livestock. "Rational Allocation of Short-Haul Transport between Rail and Road," Qi Yong, Beijing, 1980, from which much of the above discussion has been drawn. - 324 - 2.27 The Chinese people are still relatively immobile - about 200 passenger-km per capita per year by modern transport means as compared with 710 in India in 1977-78; 411 in the USSR in 1950 and 993 by 1965. The low mobility results in part from the low density of the transport network and its limited capacity. According to Chinese sources, for example, on 25 trunk rail lines there is no room to increase the number of passenger cars and trains without reducing freight transport. Passenger equipment is also in short supply. In 1979, for example, the railway had 15,000 passenger cars but 5,000 of them could not be used with diesel or electric locomotives. This results in overcrowding on the principal long-haul routes which have been mainly dieselized or electrified, as well as on suburban services. In 1979 there were said to be only 35,000 passenger buses, or one for every 30,000 people in China - and no private automobiles. Most of the buses are adaptations of Liberation trucks with low efficiency and high energy consump- tion. Most of the passenger vessels owned by the shipping companies are used on the Chang Jiang, and only a small proportion for coastal traffic. Many are said to be outmoded, in need of maintenance and frequently out of service. In aviation there are about 20 different aircraft types. This adds to maintenance planning and operations difficulties which, in turn, contribute to low equipment utilization rates. Half of the country's 41 main line rail stations have been built or remodelled since 1949. At both these and others, however, waiting facilities are limited and passengers have to stay outdoors in inclement weather. 2.28 Short-haul passenger services appear to be subsidized; for instance, on average the prices of one-way short distance rail tickets cover only 20% of the costs. This stimulates traffic which, in turn, adds to congestion. The base price for rail tickets under 50 km is 1.75 fen per passenger-km or 70% of that of the price for bus transport. Again, this encourages short distance rail movement. Ticketless traffic on the railway is reported to be about 5% nationwide, but the share is higher in the northwest. Efforts are being made to reduce this by, among other measures, improving the present cumbersome and inefficient ticket sales arrangements. 2.29 Passenger transport facilities need to be improved to support a growth in tourism by both overseas Chinese (1.0 million p.a. approximately) and other visitors (about 200,000 per year). For example, 11 of the 39 main tourist cities and scenic places do not have an airport, so tourists must go by train if they can find space. There are also potentially important tourist areas which are not even served by rail, and road access to them is poor. 2.30 Any approach to alleviating what both the public and government in China see as a growing transport difficulty must recognize that (a) the travel needs of the country-s 800 million peasant population are primarily short distance and mainly by road; (b) in the urban areas most private and journey to work trips will be short distance and mainly by bus and bicycle, though there is some significant suburban rail traffic in a few locations; (c) for overseas tourists and some internal administrative and business journeys - 325 - travel over 1,500 km will be made by air for time-saving reasons; (d) for many years to come for most of the Chinese people long distance travel will be by rail, though again there may be selected routes on which water transport may be important. However, as discussed elsewhere in this report, long-haul and short-haul rail services will have to be operated in completely different ways to lower costs and increase efficiency; and (e) any modest percentage increase in passenger traffic as a result of increasing incomes and population will generate very large pressures on the transport system in terms of absolute numbers of people wanting to travel. For example, a continuation of the over 6% p.a. long-term passenger growth rate implies nearly doubling by the end of the 1980s. Such a growth rate is entirely consistent with experience else- where. One option open to the Government is to make modest improvements and let poor service standards act as the rationing system to cut the demand, but this would add to what is already a frustrated or pent-up demand situation in passenger travel, with adverse public reaction. Alternatively, the Government can make a policy decision to meet a substantial amount of the demand. To do so will mean that the vehicle manufacturing, road improvement and energy implications of increased road transport must be confronted as major policy decisions also. F. Transport and Energy 2.31 Although China, unlike many developing countries, is not yet a net energy importer and, thus, is not under immediate balance of payment pressures because of world oil price increases, the role of the transport sector in the energy scene of China needs examination for many reasons. First, there are opportunities to encourage a more efficient use of energy consumption in the sector through appropriate pricing and conservation measures, although their short-run effects on total energy consumption are not likely to be large because the sector accounts for only about 5% of the total commercial energy consumption. (This share is about 16% but growing rapidly, however, in petroleum and its products, which must now be carefully economized because of stationary or declining output.) Secondly, the differences between transport modes in types of energy used and in relative energy intensiveness (i.e. the energy input needed to produce a ton-km or passenger-km) have important implications for major policy decisions relating to motive power and, particularly, the rates of dieselization and electrification on the railway and the extent of dieselization in the road transport industry. Decisions about these, in turn, have important implications for vehicle equipment manufacturing and other activities, and are likely to become of increasing significance in the energy scene over the longer run. Thirdly, since very large volumes of coal (and lesser amounts of coke and petroleum) are handled by the railways, ports and coastal shipping, the efficiency and transport capacity available in these activities are relevant to major - 326 - decisions that have to be taken within the energy sector itself (e.g. mine-mouth versus load center electricity generation; coal washing before transport; the size and timing of contracts for coal exports). 2.32 The transport sector consumed only about 5% of the total energy available in 1979, and, as shown in the following table, this was divided roughly as rail 40%; roads 47%; and water 13%. Table 2.1: ESTIMATED ENERGY CONSUMPTION IN THE TRANSPORT SECTOR (1979) Million tons % Product and user group of coal equiv. share Coal - railways 11.9 37 Oil 20.6 63 of which - roads 15.2 47 - water 4.1 13 - railways 1.0 3 - other 0.3 1 Total 32.5 100 Source: Ministries of Energy, Railways and Communications. The small share of transport in China's total energy consumption contrasts sharply with experience elsewhere. For example, the share is typically in the 15-25% range in high and middle income countries and in the 10-20% range in low income countries./l In India, though, the transport sector uses over 33% of that nation's commercial energy and over 50% of its oil supplies./2 In many countries road transport usually accounts for 70-85% of the energy directly consumed by the transport sector, with rail and air transport con- suming about 3-5% and 5-10% respectively. China clearly is different. The role of railways is much more important than in any other large economy; road transport is of lesser significance than elsewhere, but is important in the small oil component of total energy supply; water transport cannot be ignored; /1 Finance and Development, Dec. 1980, Vol. 17, No. 4, p. 13. /2 Report of the National Transport Policy Committee, New Delhi, 1980, p. 27. - 327 - and aviation is relatively insignificant./l The small share of transport in energy consumption in China is also explained, among other reasons, by (i) the generally under-developed state of its road transport sector as compared, for example, with higher income countries or other large area developing countries such as Brazil and India; (ii) the unique situation of no private automobile ownership; (iii) development policies which have given heavy emphasis to maximizing self-sufficiency at the regional/provincial/ local levels and thus minimizing transportation demands; (iv) administrative and physical disincentives to personal travel; and (v) a deliberate restraining of truck and bus production and imports. There may also be statistical underestimation, since part of the oil required by industry and agriculture may be used in fact for transport. 2.33 Unlike in many Bank member countries, the level of gasoline pricing for automobile use is not a major issue in China - the average Chinese price for gasoline is 70% above the international price. Nor, since there are very few diesel trucks, is the question of the relative prices of gasoline and diesel in the development of the trucking and bus industries. The prices for gasoline used by trucks, however, do not encourage fuel economy. At a national Conference on Energy and Transport held in Shanghai during November 1980 the delegates were "unanimous in recognizing that because of poor management, confusion in the transport market, surplus capacity in some areas, frequent empty runs, a low 'full rate', etc., a great deal of gasoline was wasted." The delegates noted also that the specialized trucking corporations generally got 30-60% better fuel efficiency from their vehicles as compared with public (i.e., Ministry, enterprise and commune 'own account') trucks of the same models by better planning and maintenance. Finally, the delegates stressed (i) that old, fuel-inefficient vehicles should be scrapped;/2 (ii) that improving the technical characteristics of China's roads would help to raise truck transport capacity, lower fuel consumption and permit greater advantage to be taken of truck service qualities; and (iii) since "experience in all regions of China had shown hard-surfaced roads can save one-third on fuel over dirt roads" that road maintenance funds should be increased and greater efficiency be made in their use. Steps such as those mentioned, /1 Whatever fuel savings can be made by better operating procedures, equip- ment utilization and other conservation measures will be useful, parti- cularly since its present fleet of Trident and Boeing 707 aircraft are fuel inefficient as compared with the latest equipment. Correct pricing of aviation fuel could lead to significant decisions about equipment replacement and aircraft operations. /2 Many trucks belonging to the Shanghai Transport Corporation, for example, are over 20 years old. - 328 - together with proper vehicle maintenance, a greater use of tractor-trailer combinations and improved driving skills, will help to conserve fuel in the road transport sector. Similar types of operational savings are also possible in the other transport modes including by a reduction in the large amount of cargo transshipment which takes place more, it seems, for administrative and institutional than economic reasons. The prevalence of transshipment increases journey circuity, requires more investment in cargo handling equipment, and raises cargo damage costs. 2.34 The Chinese authorities recognize that there is an obvious potential for energy savings in the transport sector which must be taken advantage of. It should be noted, however, that the impact on total energy consumption would be modest - industry is the great consumer. Chinese experts estimate that perhaps 40% of the energy now consumed in the transport sector could be saved by technology, policy and energy management changes. The effect of such a 40% savings would mean a reduction of only 2% in total commercial energy consump- tion. While this is obviously desirable, it has to be offset against the major investments and other factors that would be involved in achieving it. It has been estimated, for example, that to replace China's steam locomotives with diesels would require Y 8-9 billion and save 11 million tons of standard coal equivalent. It will take time for significant energy savings to materialize since they depend on a combination of developments such as more fuel efficient gasoline trucks; increased production of diesel trucks; shifts from steam to electric and diesel traction on the railways, and from land to water transport in the internal distribution system, including a greater use of barge trains; and large investments to upgrade petroleum refineries. What can be expected in practice are incremental effects in all of these, leading to small but welcome energy savings. 2.35 Chinese technical experts are working on ways to improve the fuel efficiency of the country-s basic truck and bus fleet which is based pre- dominantly on an outmoded pre-World War II design. About 150,000 of these vehicles are still manufactured annually. Their fuel consumption is reported to be 15% higher than for vehicles of similar capacity produced elsewhere, but they do run on low octane gasoline. It has been estimated that 10% reduction in the annual fuel consumption of trucks in China would save 800,000 tons of gasoline, or some $250 million at international prices. A results-oriented, and time-based, research program to achieve this should be supported fully with liberal funding by the government. This should include consideration of alternative fuels such as liquified petroleum gas (LPG) which is not a technical problem but could be a supply constraint in China. 2.36 The potential for a greater role for road transport was discussed in Section D above. Even though this role is primarily in short-haul traffic, larger size, diesel powered, trucks would be necessary. China's production of diesel fuel is adequate at present, but it could not meet a large shift from gasoline to diesel in the short run; a further investment in petroleum cracking facilities would be required. (But it may be needed in any case, to - 329 - meet the rising demand for gasoline.) Increasing the proportion of diesel vehicles in the vehicle fleet will require overcoming technical problems in producing diesel fuel injection pumps as well as heavy investments to modify the oil refineries. Thus, since increase in the potential supply of diesel fuel remains limited, the prospects of a major shift to diesel power in road transport is not likely in the short run. Nevertheless, there is a case for some increase in diesel output to supply fuel for large imported trucks (e.g. needed to carry containers) and the railways so that they can increase the size of diesel locomotive fleet. 2.37 China's railway is exceptional among the world's major railways in that 78% of its locomotive fleet consists of steam locomotives, and only some 20% are diesel and 2% electric. Currently, there are about 150,000 railway locomotives in the world, of which about two thirds, or 100,000, are diesel powered. Excluding China, 95% of the railways in 109 countries use diesel locomotives and in at least 50% of the countries diesels are the main loco- motive power./l The only other major railway system where steam traction remains important is India where it accounts for 30% of traffic and consumes 12 million tons of coal - the same consumption as in China, but for a much smaller freight throughput. China still produces about 300 steam locomotives annually to meet replacement and capacity expansion needs, even though Chinese experts fully accept that burning coal in steam locomotives is a low-efficiency and uneconomic form of coal utilization. Technologically, steam locomotives have improved over the past 30 years in China and still further improvements in their energy efficiency are being aimed at, from the present 6-8% to as much as 10%, with the help of pre-sorting of the coal used. Accompanied by better fuel management and operational practices, these could generate still further saving in coal. 2.38 The route to fuel efficiency in China's railway is, nevertheless, towards the higher heat efficiency of diesel and electric locomotive power which also provides increased line capacity over steam operation. This is accepted in China./2 The practical problems relate to questions such as how fast the changeover should be, how much of each should be used, on which lines first and at what costs, and what would the implications be for the phasing down of steam operations and locomotive production. In terms of China's investment resource constraints and present electricity supplies, diesel locomotion is attractive. It has the advantage of low initial invest- ment, speedy project starts, and the utilization of production, overhaul and /1 Internal Document, Chinese Transport Economics Research Commission, November 1980. /2 Energy efficiency of diesel locomotives is estimated by Chinese officials to be 35% compared to 20% for a system using electric locomotives, and 6-8% at present for steam locomotives. However, oil required for diesel fuel is more expensive per calorie of heat than the coal or hydroelectric power needed in an electric system. - 330 - maintenance capacity which is either already in place or planned (diesel output has averaged about 160 locomotives per year for the past four years). There are many rail lines on which increased use of diesels would be appro- priate either because traffic volumes are below those clearly needed to economically justify electrification and/or lines in terrain not character- ized by steep gradients and long and numerous tunnels which makes electrifi- cation operationally advantageous. A significant shift to diesel, however, would not be desirable if it meant importing fuel from a world market that may experience a short supply of diesel worldwide. Shifting towards diesel, however, will require an examination also of present locomotive pricing policy which, it has been reported, limits diesel development by high prices and profits, as well as the relative prices of coal and diesel oil. Greater efforts to improve the quality and reliability of diesel locomotives, and the supply of spare parts for them, will also be needed. 2.39 About 20% of the total route-km of China's railway is located in the coastal and northeastern parts of the country, but they carry 80% of the traffic volume. Traffic growth on these higher density line sections will make some of them candidates for early electrification. This will need to be planned in an integrated way, however, taking into account the expansion of power supplies, locomotive manufacture (about 40 electric locomotives per year at present), and the economic evaluation of each major line segment. The issue of locomotive power choice, however, is a complex one involving economic, technical, social and financial implications that are not limited to the internal aspects of railway management and operations. There are spillover effects into the electricity supply, petroleum and coal producing industries as well as relative environmental, labor and national security issues. Steam power is clearly much less energy efficient than diesel or electric which are generally regarded as about equally energy efficient. Furthermore, steam has limited operational capabilities in mountainous areas, tunnels and deserts. In view of China's longer run potential for hydro power development and its lesser current prospects in petroleum, electrification offers energy independence, relatively low operating costs, but much higher initial capital outlays than diesel, and longer gestation periods in becoming operational. Any decision analysis must recognize the Itrade-offs' involvedand correctly price inputs such as labor and the alternative energy types in terms of their opportunity costs. In the longer run electrification is the solution for heavy traffic lines, but at this point the Chinese railways do not seem to have a firm plan for modernizing motive power. Line electrification is proceeding but in what may be a disjointed manner. To maximize the impact of the greater amounts of electric traction_needed, a detailed plan should be developed which, among other things, would cover the production of modern, efficient locomotives suitable for the operating conditions of the system as well as coordinated rail line improvements where these are justified. Such a plan should also include a strategy for the use of diesel in the short to medium term as a transitional step toward the longer run electrification of large parts of the system. It is clear, however, that given the investments and other - 331 - elements involved, shifts in the distribution of motive power can only take place slowly. The result is likely to be, therefore, continued heavy dependence on steam, some increase in diesel and the beginnings of a longer run effort to increase electrification, assuming important decisions are made in the power sector also. 2.40 Coal shipments account for 38%, or over 400 million tons, of the total tonnage moved by rail in China. This compares, for example, with 33% in India (1977-78); 32% in the US (1979); 30% in the USSR from 1928-53; and 10% in Romania - one of the major railways of Eastern Europe. Coal is the main element in China's present energy structure and will continue to be dominant in the whole transport system. The railway planners assume for planning purposes that 65% of total coal production will end up at the railway. This appears consistent with 1979 coal traffic and production figures./l If coal production increases at, say, 4% p.a. for the next decade, and the current transport coefficient ratio continues to apply, coal traffic on the railway would amount to 600 million tons in 1990, an increase of about 45%. To move this additional traffic would require substantial rail investment, particularly if present coal marketing distribution and transportation practices are continued. The amount of investment required can be reduced by, among other things, (i) an increase in the washing of coal prior to shipment, which would remove about 15% of the waste currently transported; (ii) an accurate weighing system for coal cars which, it is estimated, could save 5% of the present coal car fleet because cars are now probably underweighed; (iii) more mine-mouth generation of electricity to reduce coal haulage; (iv) the introduction of large size, unit coal trains which the Chinese authorities have studied for use on selected key routes such as Datong-Qinhuangdao; (v) a modest increase in dieselization on the railway would save the railway from carrying coal for its own needs; (vi) an increased use of water transport; and (vii) the use of slurry pipelines if these are demonstrated to be superior in economic and technical terms in China and do not divert large quantities of water which would be needed in agriculture. 2.41 Intense discussion is taking place within China on the general question of improved longer term distribution systems for the country's coal and, particularly, on the best way to exploit the Shanxi major coalfields, the key to which seems to be investment in railroads and ports. The discussion is probably handicapped, however, by insufficient knowledge about the relative real costs of transport by the different modes; coal demand volumes and locations; industry production plans and location decisions; equipment technology and distribution system alternatives; and so on. The suggestion has been made within China to set up an organization of the RAND Corporation type to do comprehensive, major studies of the type that energy distribution and related transport problems require and to make recommenda- tions for consideration by decision-making bodies. The idea of such a /1 Output 635.0 million tons (0.65) = 413.0 million tons of rail traffic. - 332 - comprehensive study has great merit and is consistent with the mission's recommendation that a major transport study somewhat along the lines of the 1980's Indian Coal Transport Study should be undertaken. Such a study could be a joint Chinese-foreign expert venture, financed as a foreign-assistance project aimed specifically at bringing technical and economic 'know-how- in this field to China. G. Employment and Training Employment 2.42 Employment generated by transport operations and investments takes two forms - direct and indirect. Direct employment is created by the construction of infrastructure, the manufacture of equipment and rolling stock, and the running of transport services. Indirect employment involves backward linkages to the industries supplying materials (e.g. fuel) and service inputs required by the transport system while forward linkages relate to cargo loading/unloading, service stations, garages and related activities, and government itself. The effect of these linkages weakens rapidly the further one moves from direct employment. 2.43 In the USA in 1978 some 10.7 million people, or 11.4% of the total civilian labor force, were employed in transportation and directly related industries. Of these, 26% were directly engaged in providing transport services; 19% in equipment and manufacture; 4% in government at all levels; and 48% in highway construction companies, gasoline stations, garages, etc. A comparable breakdown is not available for China which., reportedly, has about 7.5 million people employed under the broad heading of "transportation" - railways 2.5 million; roads over 3.0 million; water transport about 1.8 million; and the balance in aviation and ocean shipping. The tradi- tional transport sector is excluded from these figures. On the basis of available information, it is not possible to determine, however, the number of people actually employed in providing transport services in China. Transport organizations provide a variety of other outputs in addition to running vehicles, vessels, planes or trains. The railway, for example, employs about 1.1 million people in 'traffic' functions; 340,000 in industry, i.e. manufacturing locomotives, freight and passenger cars, signalling equipment, etc.; 470,000 in construction, i.e. building rail tracks, schools, houses, offices, hospitals, etc., for railway-system use; 70,000 in medical service provision; and another 90,000 to provide educational services for 1.1 million students from the primary school to university level. In the water sector, enterprises are similarly engaged in equipment and infrastructure construction but no breakdown is available. Until additional information is available at a disaggregated level, it is not - 333 - possible to make meaningful productivity comparisons between transport in China and other countries. Nor, on the evidence available, is it possible to calculate labor productivity ratios for the different modes within China. 2.44 Given the need to provide increasing numbers of jobs in China, it may be asked whether the transport sector has a contribution to make. Here again there is insufficient information available to make a safe answer. A recent investigation in India into the "comparative employment intensity per unit of investment" in the different transport modes concluded that in that country inland waterways had the highest employment coefficient, followed by bullock carts. Both of these require low capital investment, but since they are slow moving and useful only for specific purposes their role is limited. Road transport generated much more employment per unit of investment than rail - trucks 17 persons per year per Rs. 100,000 and buses 9 per year, as compared with 4 persons per year on the railways and less than one person per year in aviation (see Table 2.2). It would be clearly inappropriate to suggest these figures apply in China, where a similar investigation is needed. Nevertheless, they are suggestive that if employment creation is a policy objective in China, road transport offers greater possibilities than rail. This question of job creation should be examined in new major project decisions, with the analysis based on prices for labor and other inputs that reflect their real scarcity or abundance (i.e. opportunity costs are necessary in planning). The employment question must be faced because of the pressure to invest in rail electrification on energy efficiency grounds. It may well be that a more capital intensive technology transport system is chosen to avoid bottlenecks which might limit the growth of the national economy and the general expansion of employment but such a decision may not be rationally arrived at given the price patterns currently prevailing in the economy. - 334 - Table 2.2: INDIA - COMPARATIVE EMPLOYMENT INTENSITY IN DIFFERENT MODES OF TRANSPORT (1977/78) Persons per year per 100,000 Rupees of investment Inland Water Transport Operations 33.6 Navigational channel development 13.2 Roads and Road Transport Construction and maintenance 27.5 Bullock carts 27.0 Three wheelers 17.1 Trucks 17.0 Buses 9.3 Taxis 3.7 Vechicle production (chassis) 1.8 Coastral Shipping Sailing vessels 20.0 Other shipping 2.4 Aviation 1.0 Railways 4.3 Source: Adapted from Report of the National Transport Policy Committee, New Delhi (India), May 1980, p. 56. Training 2.45 The importance of trained personnel to manage, operate, advance technical knowledge and undertake planning and investment studies in the transport industry cannot be overstated. This is well recognized in China and significant efforts are now being made to overcome the shortages in trained personnel resulting from the turbulent years of the Cultural Revolution. Within each of the main Ministries responsible for transport activities there are universities and technical institutions for the long-term training of cadres. In addition, various short-term training programs are provided and efforts are being made to send more Chinese students abroad to study transport technology, economics and planning. - 335 - Scholars and other transport experts visiting are invited to lecture in China. The efforts, however, do not seem to be commensurate in size with the immense task needed to overcome the backlog of missed training and to meet the needs of a growing future transport system. Nor are they sufficiently oriented to interdisciplinary and economic analysis and management decision making. The many specialized institutes which exist understandably fulfill the specific training needs of the particular mode(s) they serve. This can lead, however, to a parochial view of transport problems, operations and research; to an inbred atmosphere of ideas and attitudes; and to defense of transport territory rather than national interest. 2.46 Apparently, there is no institution in China which imparts training to those who have to look at the transport system as an integrated process and plan its evolution in a coordinated framework. To stimulate such training and applied research studies - of the type being undertaken by the recently recreated Institute of Comprehensive Transportation (State Economic Commis- sion) - that would look at transport planning, management, and project evaluation techniques in a multi-modal, interdisciplinary way, a national level center or institute seems desirable. In addition to such a core or central institution, it is desirable that many universities and institutes in a country of China's size take an increased interest in promoting different aspects of transport technology, planning and operations. To ensure that the required training facilities are planned and developed in a coordinated way and, particularly, that the substance of transport training is relevant, an apex body is needed within the framework of the central government. The Academy of Social Sciences, perhaps in cooperation with the China Transport Economics Research Association, might be a suitable coordinating forum for an enquiry into the state of training in the transport sector and the development of a strategic plan for its improvement. Such an inquiry would benefit from the advice of a small selected group of distinguished outsiders who have been closely involved in government, practical transport operations, and academic training in transport economics and planning. 3. RAILWAYS A. Introduction 3.01 The railways in China are the major carrier in the modern transport sector. The system has more than doubled in size since 1949 from 22,000 route-km to about 50,000 km of which 8,000 km were double or multiple track and over 1,000 km electrified in 1979. The railway fleet consists of mainly steam locomotives (78% of the total fleet, with diesel 20% and electric 2%), 260,000 freight cars and 15,000 passenger coaches. Most of the equipment is manufactured locally; sporadic imports have been made in limited quantities with a view more to acquire technology rather than supplementing domestic production. - 336 - 3.02 China railways is the third largest freight railway network in the world after those of the USSR and the USA. Freight traffic exceeded 1,000 million tons in 1979, with the major commodities being coal (38%), con- struction materials (15.2%), ores (11.3%), iron and steel (5.8%) and petroleum (5.4%). Passenger traffic was expected to reach 900 million passengers in 1980, with the railway authorities forecasting it will continue to grow rapidly at about 6% p.a. to 1985. 3.03 Operations, which are largely in the hands of 20 regional adminis- trations, appear efficient and show a high level of track and equipment utilization. Only the USSR had higher average freight densities in terms of million ton-km per route-km (23.4) than China, which had about 12 million ton-km per route-km in 1979. Comparative figures for other systems are: USA, 4.5; India (broad gauge only), 4.6; and Romania, 6.3, though there are individual lines in all of those countries which reach over 20 million ton-km per route-km p.a. Freight car turnaround in China, with an average of three days, is extremely good. 3.04 Financially the Chinese railways are reported to be very profitable with revenues in 1979 being twice as high as operating costs, including a depreciation charge, although this charge would not be regarded as realistic on western railways. In 1980, the level of net operating surplus (tax and profits) was to be reduced from 50% to about 30% by increasing the depreciation allowance. Tariffs are said to be high in relation to costs, except for short distance trips where, reportedly, tariffs do not cover costs. Tariffs are uniform throughout the country; thus, they result in substantial interprovincial and, possibly, commodity cross-subsidization because of divergences from the real transport costs involved in providing the services. 3.05 The main problem areas facing the Chinese railways seem to be in: (a) the choice of motive power where, to date, only slow progress has been made to replace steam by more efficient diesel and electric locomotives; (b) the effects of uniformity in operations, i.e. running freight trains of uniform length, standardization of equipment, and the handling of long and short haul passenger services in the same way; and (c) the cross-subsidization between short and long distance traffic and also between regions of the country resulting from the present relation between tariffs and costs. - 337 - B. Institutions, Organization and Management 3.06 The railroads of China have their own Ministry within the State Council. This not only reflects their economic and political importance within the country but also that major decisions as to their role and their share in the distribution of investment funds among modes are made at the highest level of the government. 3.07 The Ministry of Railways is a big, almost self-contained, organiz- ation. It employs nearly 2.6 million people, of whom about 1.5 million are involved in what elsewhere would be labelled the transportation function. The others are engaged in the manufacture of locomotives, rolling stock and spare parts; laying track (except for lines built by the Peoples Liberation Army); educating its railway staff and their dependents from elementary school through university and technical school; and providing medical, housing and other services. This integrated self-sufficiency is paralleled in the railway history of other countries, particularly when support services could not be provided by others in the regions and towns serviced by the railroad. This separation of the railway industry from the rest of society, particularly in managerial education and manufacturing, has had an obvious rationale and many advantages. Nevertheless, it may lead to a degree of isolation in management techniques, analytical methods, and technological orientation. 3.08 The organizational structure of the Ministry encompasses all the functions described above, though some decisions are highly centralized and others decentralized. The actual extent of decentralization in operational and financial decision is unclear, although railway officials emphasize their desire for further decentralization. Structurally, the Ministry is divided on a functional basis with 12 Vice-Ministers, and within each broad functional area there are departments and bureaus. 3.09 The staff and functions of the Ministry are divided broadly into five groups as follows: No. of employees in 1979 ('000) Traffic and operations 1,503 Industry 367 Capital construction 512 Education 90 Others 92 Total Employees 2,564 - 338 - Traffic and Operations 3.10 This first function of the Ministry is concerned with the physical aspects of operating and maintaining trains, tracks, stations, signals, etc. - the transportation function which is performed by 20 Regional Railway Adminis- trations (RRAs). In many ways also the organizational structure reflects the railways' present level of technology and is not unlike that in other large countries in the days of steam locomotion. Motive power and passenger cars are controlled and operated separately by each RRA, while freight cars move throughout the system. Exceptions to this rule are made for certain long- distance passenger express trains on which equipment and crews operate across several provincial and RRA boundaries. Thus, centralization occurs in budget allocation strategy and in major investment approval decisions, but control of day-to-day operations is decentralized with supervision exercised by regular daily reporting of events. Carloadings, for example, are reported daily by the RRAs, with the movement of surplus cars being controlled from Beijing. This tends to ensure effective equipment utilization. Locomotive movements, however, are normally restricted within the RRA of ownership, with power units being exchanged at the RRA boundaries rather than run through. This localiza- tion has a number of advantages for steam locomotive maintenance and opera- tion, but seems prima facie inefficient for diesel and electric locomotives, although further analysis of the situation is needed. 3.11 Within the Traffic and Operations complex of the Ministry the following functions are controlled by separate headquarters units: Transportation - actual train movements and their scheduling Locomotives - administration of motive power and maintenance Rolling stock - maintenance and repair Civil Engineering - track and bridge maintenance, including housing Signalling and Telecommunications Traffic safety Industry 3.12 The second group of activities is a complex responsible for the manufacture of railroad equipment and spare parts. It operates 68 plants as follows: Locomotive manufacturing and maintenance 12 Rolling stock manufacturing 12 Locomotive and rolling stock repair 6 Machinery manufacturing 3 Engineering shops 3 Tie (sleeper) manufacturing 10 Signalling and telecommunications 9 Timber preservation 8 Engineering spare parts 5 Total 68 - 339 - Capital Construction 3.13 This third group, in addition to five construction bureaus with responsibilities for actually building rail lines and buildings, also includes five general engineering institutes that deal with design and four specialized engineering institutes for tunnels, bridges, electrification, and building construction. Education 3.14 The fourth main group of activities relates to the many educational institutions of the Ministry of Railways that serve 1.1 million students: Institutions No. Senior colleges 8 Technical colleges 39 Technical schools 33 Middle schools 591 Primary schools 930 Research institutes 1 Science research offices 17 Planning and Investment 3.15 Coordination of railway investment planning is the responsibility of the Planning and Statistics Bureau at the Ministry's headquarters. Neither general plans for the future of the railways nor detailed traffic forecasts were available./l It appears that the general assumptions being made currently are that freight traffic will grow somewhat more slowly than the national income, and passenger traffic will grow faster. The initiative for new projects relating to railway operations comes mainly from the 20 RRAs, which submit them to Headquarters for approval, coordination, and in the case of major projects, for onward transmission to the State Planning Commission. The RRAs, in turn, may be acting in response to the requests of provincial governments and industries. 3.16 Railway investment was relatively very heavy in the mid-1950s when the war-damaged system was being rehabilitated, unified and extended. The situation in the 1960s is less clear, but many new lines were being constructed. Lately, however, it is evident that railway investment has been reduced and the emphasis shifted away from new lines construction to capacity increases on existing lines (Table 3.1). This seems an appropriate policy. /1 The pattern of route development, however, appears consistent with the 100,000 km network proposed by Dr. Sun Yat-Sen when he was Director General of the National Railways. - 340 - Table 3.1: NEW INVESTMENT IN RAILWAYS 1970 1975 1979 1980 -------- (Y billion) --------- New lines 3.383 1.902 1.234 n.a. Modification of existing lines 0.292 0.696 1.108 n.a. New plant 0.104 0.112 0.148 n.a. Acquisition of rolling stock 0.620 0.730 1.000 n.a. Total 4.399 3.440 3.490 3.1 Source: Ministry of Railways. In addition to these clearly categorized new investments which are considered as capacity additions, the railways make a budgetary provision for 'major repairs' and 'renovation,' which include track and rail renewals, replacement of sleepers, welding of rails, replacement of locomotives, coaches and cars, replacement and improvement of signal and telecommunication and minor modifications to existing lines. In 1980 a sum of Y 3.1 billion was budgeted for these expenditures, most of which would be considered as capital investment in many other railways. 3.17 Although, as mentioned above, there is no approved railway develop- ment plan, future investment strategy directions were expressed as follows, but no indicative figures were available: (a) develop railway capacity in the coal mining areas, particularly Shanxi, Inner Mongolia and Hebei (the region referred to as the North China area); (b) improve main railway lines to ports for imports and exports; (c) improve railway transport generally in the coastal areas to assist economic growth; (d) improve the rail network links from coastal to hinterland areas; (e) improve passenger service; and (f) improve motive power supply. These are all valid general objectives and statements of intent. In practice, they would require detailed evaluation as to costs-benefits, relative priorities and system impacts. - 341 - 3.18 The following major projects, consistent with the themes above, are presently under construction. Table 3.2: MAJOR RAIL PROJECTS IN PROGRESS - END OF 1980 Estimated total Construction km cost period (Y bin) The following three lines serve the North China region and transport coal from Shanxi & Inner Mongolia to Qinhuangdao: Beijing-Datong - electrification (already double track) 377 .20 80-84 Beijing-Qinhuangdao - double track electrification 300 1.20 80-86 Datong-Baotou - double tracking 430 .41 78-90 The following four lines carry coal from mid-Shanxi to the ports of Qingdao and Shijiusuo: Taiyuan-Shijiazhuang - electrif. (already double track) 235 .54 76-82 Shijiazhuang-Dezhou - double tracking 170 .14 78-82 Jinan-Qingdao - double tracking 363 .70 78-85 Yanzhou-Shijiusuo - new single track construction (Japanese financing) 300 .46 80-85 General Baoji-Lanzhou - electrification (single track) 511 .37 78-82 Zhengzhou-Xuzhou - double tracking nearly completed 319 .43 78-81 lengyang-Guangzhou - double tracking with electrification 540 1.60 79-87 TOTAL 3,535 6.05 Source: Ministry of Railways. - 342 - C. Railway Facilities Routes/Tracks 3.19 The system consists of 49,800 route-km, almost all of which is standard, other than for some 800 km at meter or less gauge. In 1979, about 8,000 km were double or multiple track and 1,000 km electrified. Electrification of another 500 km was completed in 1980. Further double tracking and electrification is in progress, as indicated in para. 3.18 above. The main lines are laid with 50 kg and heavier rail, while most other lines have rail between 40 and 50 kg. There is about 7,000 km of long-welded rails. On the main lines, 55% of the sleepers are timber; the rest are concrete. Motive Power 3.20 Motive power represents a critical element in railway planning not only for reasons related to energy issues but also because the entire railway operations are dominated by the use of steam. This limits areas of management, the length and weight of trains, passing tracks, and yards, and a number of other operational features. 3.21 In freight service the steam locomotives are 2,900 hp, the diesels 1,800-3,600 hp and the electrics 5,000-7,000 hp. The steam locomotives present no particular problems except for their inherent fuel inefficiency and distance limitations, particularly in water short areas. They have capacity constraints and limitations also in the mountainous areas with high ruling grades and tunnels. The existing electric locomotives do not appear to present ostensible problems, although the technology may be somewhat outdated. Of the 200 electric locomotives in use, 64 are French-made (25 kV 50 cycle), and the remainder of Chinese manufacture. The diesel locomotives are a problem, however. Of the 2,000 sets, about 180 are imported, of which one-half came from Romania, 50 from France and the remainder from West Germany. The Chinese diesel has its origins in the American made unit (FM-38-D) given to Russia under lend-lease in World War II. 3.22 Recent locomotive acquisitions for replacement and net addition have been as follows: Steam Diesel Electric Total 1970 250 165 25 440 1975 216 126 16 358 1979 300 206 40 546 1980 317 140 40 497 - 343 - Since 1975, China has imported 90 diesel locomotives (of which 50 were imported in 1979 alone); but no electric locomotives. The decline of diesel acquisition planned for 1980 represents the reduced investment program. Recent electric locomotive production has been stockpiled in anticipation of completion of new electrified sections and in particular of the 600 km line from Baoji to Lanzhou. Besides the railways, mines and other enterprises acquire about 100 locomotives per year. Rolling Stock 3.23 The railway system operates 259,000 freight cars and about 15,000 passenger coaches as compared to 66,000 and 7,000, respectively, in 1948. FREIGHT CAR OWNERSHIP - 1979 ('000) Open cars 159 Covered equipment 40 Tank cars 33 Flat cars 20 Refrigerated equipment 3 Miscellaneous 4 Total 259 The freight car fleet is young in comparison with that of many other railways, with over one-third of the fleet manufactured after 1965. In recent years, acquisitions have kept pace with traffic growth, but not in 1980. RECENT ROLLING STOCK ACQUISITIONS Coaches Freight 1970 524 13,000 1975 707 13,400 1979 800 12,500 1980 965 9,600 - 344 - The cutback in freight car acquisitions in 1980 reduced car supply growth below that of transport demand. On the basis of a 30-year average life, a regular car renewal cycle would require slightly over 8,000 new freight cars/year. The 1980 acquisitions, therefore, probably represent little by way of a net increase in capacity - a situation which could not be main- tained too long without problems. The railways, for example, estimate that every additional 10 million tons of annual traffic requires 2,500 more cars. A 4% p.a. freight traffic growth rate, therefore, would mean a minimum of 10,000 extra cars p.a. Added to the normal replacement figure above, this gives twice the amount actually acquired in 1980. Mines and industrial enterprises also require about 2,000-3,000 cars per year. Passenger coach acquisition has increased over the last few years, reflecting the rapidly rising demand for passenger travel. The railways, however, estimated their annual need for passenger coaches is at least 1,200, which is substantially more than in the 1980 actual acquisition program. 3.24 Most freight cars have a 60-ton capacity. While over 60% of the fleet consists of open cars (gondolas) for the movement of coal, ores, sand and gravel, the railways has started to produce specialized cars such as bulk grain cars, and refrigerated cars. However, in 1975 to 1977 the railways imported some 960 tank cars and 300 refrigerated cars. The equipment is very well maintained and down time is extremely low. D. Traffic Freight 3.25 China's railway is the third largest freight railway in the world after the USSR's and the USA's. Freight traffic has grown from about 100 million tons in 1950 to over 1,000 million tons in 1979, or an average growth rate of 8.6% p.a. More recently (1970-79) traffic has grown at 5.7% p.a., and from 1975-79 at 6% p.a. (Table 3.3). - 345 - Table 3.3: ORIGINATING FREIGHT TRAFFIC (million tons) 1970 1975 1976 1977 1978 1979 % Coal 254.4 316.2 295.7 347.4 402.4 413.2 37.7 Coke 9.1 12.0 11.3 12.0 14.4 14.1 1.3 Petroleum 37.0 62.2 58.0 58.9 61.2 59.3 5.4 Iron & steel products 30.6 41.8 38.9 42.6 58.9 63.9 5.8 Metallic ores 40.7 51.8 46.4 49.9 64.9 61.8 5.7 Nonmetallic ores 32.3 47.4 48.8 54.0 62.2 60.6 5.6 Construction materials 88.9 136.0 136.0 152.2 170.0 166.7 15.2 Cement 12.9 16.0 14.8 15.8 19.6 21.9 2.0 Timber 28.7 35.0 32.2 35.3 38.0 39.6 3.7 Fertilizer 10.0 10.9 9.6 12.0 16.6 18.8 1.7 Grain 20.8 21.9 20.5 24.6 24.6 28.4 2.6 Cotton 1.5 1.4 1.4 1.5 1.5 1.4 0.1 Salt 8.8 8.9 8.5 10.0 10.1 9.0 0.8 Miscellaneous 90.0 105.9 99.0 113.6 130.6 136.4 12.4 Totals 665.5 867.5 821.2 927.1 1,074.9 1,095.0 100.0 (Rounded) Source: Ministry of Railways. - 346 - 3.26 The miscellaneous category of traffic in the above table, which includes chemicals, machinery, livestock, fresh fruits and vegetables and less than car-load traffic, is frequently referred to as "Daily Usage Products". Better information about the mix of rail traffic would be desirable but a few key elements can be seen. Coal is clearly the single most important commodity, accounting for 38% of all traffic tonnages. Energy products, as a group, accounted for 44% of all originating traffic. A striking feature is the low volume of foods. Foodgrains, for example, amounted to only 2.6% of total tonnages in 1979, and other food stuffs are masked in the miscellaneous category. For two RRAs where data on perishables and livestock were available, about another 1% would be added to the above grain percentage. By contrast, in the USA where the motor carrier is used extensively, particularly for perishables, food and food products account for about 15% of rail originations, and in India foodgrains, fruits and vegetables and other agricultural products account for 19% of total railway ton-km. This relatively small traffic in agricultural products in China is a reflection of the policy of intra-regional self-sufficiency. Passenger 3.27 Intercity passenger traffic is almost exclusively by rail, with great pressure falling on the 780 scheduled passenger trains operated daily in late 1980. The amount of passenger-km travelled has grown at about 5.5% p.a. since 1970 (Table 3.4). The railway authorities anticipate passenger traffic will grow at 6% p.a. through 1985, a rate faster than for freight. This would mean a total of 1,200 million passengers carried, or 300 million more than in 1980. Such an increase will require substantial investments in passenger equipment as well as in line and station improvements if public frustration is to be minimized. In India inter-city rail passenger traffic was predicted to grow at 4% p.a. during the Fifth Five-Year Plan, but the actual traffic increase was 7% p.a. and at a time when road transport was growing faster than it is in China. It is clear that in China the amount of passenger traffic by rail is determined more by the capacity provided by the railways than by the response to market demand - a situation in striking contrast with many of the world's railways which have excess passenger capacity. - 347 - Table 3.4: PASSENGER TRAFFIC 1980 1970 1975 1976 1977 1978 1979 estimate Passenger (million) 516.5 696.5 704.9 786.6 807.3 856.1 900.0 Intra-region 462.3 465.5 522.0 534.4 570.0 Suburban 162.6 167.7 186.2 190.0 194.6 Inter-region 71.6 71.7 78.4 82.9 91.6 Passenger-km (million) 95,259 95,470 102,015 109,081 121,373 Intra-region 36,690 37,355 41,239 43,179 48,137 Suburban 3,642 3,843 4,300 4,406 4,577 Inter-region 54,927 54,272 56,476 61,496 68,659 Average Distance (km) 137 135 130 135 142 Intra-region 79 80 79 81 84 Suburban 22 23 23 23 24 Inter-region 768 757 720 742 750 Source: Ministry of Railways. - 348 - E. Operations Freight 3.28 The demand for rail freight service arises, in theory, from the national economic plan approved by the State Planning Commission and the Council of Ministers, with each ministry providing an estimate of its trans- portation needs, which are then balanced against the capacity constraints of the railway system. The balancing of such an input-output matrix in even a small country is a major task. In China it works in aggregate terms because of fixed coefficients drawn, it seems, from a rudimentary input-output matrix, which assumes rail market share coefficients for production as follows: Product % of output moved by rail Coal 65 Petroleum 50 Steel 57 Cement 30 Grain 8 3.29 The various RRAs translate the Ministry's and other plans into actuals for their own administration, but if plans exceed capacity limita- tions, a series of reiterations is worked backwards through the Planning Commission. Since transportation is a critical element in the plan, agreement is necessary to assure service to key enterprises. The railway authorities seem to make the final decisions on capacity allocation, investment timing, etc., and may thus require provinces and enterprises to modify their production plans accordingly. Since, however, much rail transportation is for established industrial, mining and construction activities, this seems to give relative stability in the allocation process but the pressures for added rail capacity are strong. 3.30 Freight traffic density has been increasing steadily (Table 3.5) and, at an average of 11.8 million ton-km per route-km, is now the second highest in the world after that of the USSR (23.4 million ton-km per route-km in 1975). Some lines in the northern coastal regions of China have freight densities in excess of 25 million ton-km per route-km. By contrast, on some of the newer and lighter traffic density lines, traffic levels may be in the order of only 3 million ton-km per route-km. Even these, however, are comparable to average densities in Canada (2.7 million), India (4.6 million), and the USA (4.5 million). In Western Europe and Japan average freight densities are only around 1.1-1.7 million ton-km per route-km. - 349 - 3.31 Average distance hauled per shipment has remained relatively constant over the last two decades or so in the 480-520 km range. This is mainly because, unlike in many other countries, significant amounts of short distance traffic in China have not yet been diverted to roads. Train weight also changed little in the last decade, but train speeds have declined some- what as traffic increased (Table 3.5). Wagon turn-around time is extremely low by any other railway standards and has improved since 1970. It is difficult to see further savings here. Table 3.5: SELECTED OPERATING STATISTICS - FREIGHT Freight density Average Trains/km Gross wt. Average Turn-around (million distance per day per train speed days /a tons/km) (km) (tons) (km/hr) 1970 8.7 525 21.9 1,953 30.3 3.21 1975 9.4 489 22.9 2,012 28.5 3.46 1979 11.8 510 27.3 2,059 28.6 3.00 /a Turn-around time is obtained by dividing total cars in operation in the system by the number of car loadings. It is apparently a management tool used by the central as well as by each regional administration. Source: Ministry of Railways. 3.32 The number of freight cars per train has remained relatively constant at between 48 and 53 cars. This is largely a consequence of the length of passing loops and station sizes, which are 650 meters for 75% of the stations and 850 meters for the rest. A 53-car train would require the full 850 meters. The cost-benefit of selectively increasing loop and station lengths should be investigated. 3.33 An interesting aspect of operations is the 'bad-order ratio' for cars, which is over 10%. Between 70% and 80% of car bad orders were caused by loading and unloading operations, 20% by wheel wear and a low 1-2% by 'hot boxes.' Derailments are rare, which is not surprising considering the track maintenance standards and the staff discipline. The very low reported hot box factor on a system that does not use roller bearing cars has interested foreign railway engineers visiting China. Manual loading and unloading by railway employees appears to be the predominant method of operations. Station yards appear to be the rule for all but the larger plants with sidings, with distribution from these yards being by a variety of modes, including human and animal power. - 350 - Passengers 3.34 Passenger trains are classified as super express, express, and ordinary, with a fare differential for super express and for foreigners generally. There is little specialized suburban equipment and stations, which means that short trips put considerable burdens on the rest of the system, particularly on the approaches to large cities and stations such as Beijing and Shanghai, which are heavily congested. Increased tourism is also constrained and a burden on the rail system since, at present, air transpor- tation is a limited alternative for much passenger transportation. The average passenger density on the system has grown with the traffic: Million passengers Passenger trains per route-km per route-km/day 1970 1.8 8.7 1975 2.1 9.1 1979 2.6 11.1 As a result of increased congestion, average passenger train speeds have decreased from about 42 km/h in 1970 to 38 km/h in 1979. 3.35 On-time train performance is high, reportedly 95% for passenger trains and 90% for freight trains. Adherence to schedules is very strictly enforced, but the strong and long attachment to present schedules may prevent adjustments that would introduce greater flexibility in the system and possibly lead to capacity increases. F. Tariffs and Costs 3.36 The information available on tariffs and costs was very limited. The Chinese railway tariff structure is simple and consists basically of five full carload (FCL) commodity groups, and five less than carload (LCL) subgroups. Rates are expressed on a distance basis with a tapered scale (Table 3.6). The present rates have been unchanged since 1967 and, according to railway staff, are 12% below their 1955 level. - 351 - Table 3.6: SELECTED FREIGHT RATES (Fen/ton-km) Commodity Group 1 2 3 4 5 Distance (km) 100 1.20 1.20 1.70 2.10 2.70 500 0.96 1.04 1.58 2.00 2.46 1,000 0.92 1.02 1.39 1.78 2.17 2,000 0.92 0.98 1.18 1.43 1.75 Ratio of rates 500 km/100 km (%) 80 86 93 95 91 Ratio of rates 2,000 km/100 km (%) 77 82 69 68 65 Source: Ministry of Railways. 3.37 As can be seen in the above table, the tapering of rates as a function of distance varies among the commodity groups. For groups 1 and 2, rates per ton-km do not decrease very much beyond 500 km, while for groups 3 to 5 there is very little taper at 500 km, but more at 2,000 km than for groups 1 and 2. The rationale behind this needs further clarification. 3.38 Traffic statistics are kept in 14 commodity groups (Table 3.3), but traffic data are reportedly not available by freight rate groups. In particular, the traffic classified as miscellaneous, which accounts for 12.4% of total tonnage, can fall into any of the above mentioned FCL and LCL classes. The railways estimate that about 54% of freight traffic falls in tariff class 1 and another 18% into class 2. Thus, almost three quarters of the traffic falls into the two lowest tariff classes, i.e. class 2 rates being only about 10% higher than class 1 rates, while those of class 5 are double those of class 1 (Table 3.6). 3.39 For the current average freight haul of about 510 km, costs are estimated at 0.80 fen /1 per ton-km. This is substantially lower than the rates charged for the various commodity groups at 500 km: A1 100 fen = 1 yuan. - 352 - Fen/ton-km Coverage of average cost Average cost at average distance of 510 km 0.80 Tariffs for 500 km Class 1 0.92 1.15 " 2 1.04 1.30 " 3 1.58 1.98 " 4 2.00 2.50 " 5 2.46 3.08 In addition to the above distance related rates, there are additional charges for loading, unloading, and for moving empty cars, which provide additional revenues, particularly for short-haul movement. Furthermore, traffic carried less than 50 km pays the minimum tariff rate for 50 km. Again no detailed data were available regarding either the traffic moving on short distances or the cost of handling it. However, there are indications that short-haul traf- fic generally does not cover its cost. 3.40 The entire role of railway prices and costs is difficult to inter- pret in a nonmarket economy. There are indications, for example, that the relative costs to the railway of coal for steam locomotives and oil for diesel locomotives are not proportional to their true costs. The reasons and consequences are unclear. Since there has not been a review of tariffs since 1967, it is clear that pricing policy is less important as an allocative mechanism than quantititive restrictions on availability of transportation. 3.41 The fact that freight rates are uniform throughout the country involves some regional cross-subsidization. This is a recognized policy of the Government and represents a sharing of the rail operating costs of development in mountainous regions, where transport costs are higher, with those in easier terrain such as the coastal areas. The manner of cross-subsi- dization seems, in practice, to be as follows, with the mechanics of cash flows being controlled by the Ministry in Beijing. All revenues are credited to it. The Ministry then returns funds to the RRAs on the basis of fixed rates based on "converted" ton-km (traffic units in which one passenger-km is equal to one ton-km). These fixed rates for each RRA are established occasionally (the last time was in 1980), on the basis of: (a) the characteristics of the traffic handled by the particular RRAs; (b) the infrastructure and equipment mix available in the RRAs with regard to age, type, technology, etc.; and - 353 - (c) the topography of the region, i.e. in a mountainous region such as Kunming 400 kg of coal is needed to move 10,000 converted ton-km, while in flat terrain such as the Beijing area, only 100 kg is needed. As an example of the rates passed back to RRAs, the Zhengzhou RRA receives Y 115.8 per 10,000 converted ton-km while Kunming receives Y 287.0. 3.42 The full implications of the present tariff system cannot be derived in the absence of more detailed information on costs by distance, commodities, and region. Clearly, as long as the railways retain their quasi-monopolistic position in the transport sector, prices substantially higher than costs can be imposed. But if enterprises secure their own motor transport, and can run it below national average rail costs, worldwide experience suggests they will take away the low cost but high priced rail movements. G. Finance and Accounting 3.43 As for prices and costs, the presently available information on finance and accounting in the railways is only sketchy. Accounts are maintained at three levels under the general control of the Ministry: - the Regional Railway Administrations (RRAs) (20) - the branches of the RRAs (60) - the stations and depots (4,867) The Ministry deals directly only with the RRAs, which in turn supervise the functions of their branches, stations and depots. 3.44 Within the present system of costs and tariffs, the railways are clearly an important source of public savings and are highly profitable. Until 1979 operating revenues were regularly twice as large as operating expenditures, including depreciation. In 1980, planned profits were to be reduced to 30% as a result of increased allowances for more realistic depreciation amounts. 3.45 The amount provided for depreciation is said to consist of two parts - one termed "heavy repair depreciation" and the other "basic - 354 - depreciation." On the basis of limited information, what follows is an inter- pretation of the treatment of depreciation. In 1980, the heavy repair depre- ciation amounted to Y 1.76 billion and the basic depreciation to Y 1.5 bil- lion, representing respectively 3.5% and 3% of fixed assets in use valued, reportedly, at historical costs. On the basis of the above percentages rail- way assets would amount to Y 50 billion ($33 billion). Railway staff indi- cated that they had been considering a revaluation of assets but that no decision had so far been made. 3.46 The funds under the "heavy repair depreciation" heading are control- led by the Ministry and the RRAs and used for track and rail renewals, replacement of sleepers, welding of long rail, and repair of locomotives, coaches and cars, signals and telecommunications equipment, mechanical equip- ment, and buildings. The funds under "basic repair depreciation" are control- led partly by the Ministry and partly by the RRAs and are used for renewal of locomotives, coaches and cars, and mechanical equipment, for minor additions to fixed assets, and for minor modifications to lines to increase local capacity. 3.47 Two preliminary conclusions can be drawn with regard to railway finances. First, the present system gives incentives to the individual RRAs to secure as much new investment as possible, since capital is free and adding it increases profits and retained earnings for depreciation. And, second, renewing equipment and minor line improvement through the basic repair depre- ciation funds are probably less rigorously evaluated than are new investments. While in traffic operations, the systems' capacity is intensively used, excess capacity may well exist in the manufacturing and maintenance facilities. H. Conclusions and Recommendations Traffic Demand and Capacity 3.48 The Chinese railways are operating at or near capacity in large parts of the system. As compared with many other railways, use of equipment is intensive. Average traffic density is high and even very high on some eastern seaboard lines. On the Shenyang-Beijing line, for instance, there are 206 trains a day, or a scheduled train every 7 minutes, leaving little time for maintenance. Freight traffic densities of up to 30 million ton-km per route-km p.a. exist on some eastern lines. This is one reason for serious bottlenecks reported in 1978 and 1979 on some lines, particularly those used for the transport of coal. - 355 - 3.49 Total tonnage decreased in 1980, as coal and oil production fell slightly and major industrial and other projects were postponed, but capacity problems in main lines do not appear to have eased. The railway planners indicate that the current economic policy shift away from heavy to lighter industry may reduce some of the short-term pressure on the railway and has already had some benefits in relation to short-haul traffic. However, if coal is called upon to substitute for petroleum use in large amounts, extra pressure will be imposed on the system by the need to haul this coal, in addition to the normal traffic growth and the rising pressure for more passenger travel. 3.50 Basically, the Chinese railway system does more than it should be called upon to do in comparison with the transportation network in other countries. It handles a sizable amount of short-haul traffic, both freight and passenger; its pricing policies, as well as those of alternative modes, puts traffic on rail which could more efficiently flow on other modes. Con- sidering the present energy balance in China, however, and the time needed to make the adjustments which would promote a better distribution of traffic among transport modes (by lessening dependence upon rail for activities in which it is of lower efficiency), large investments will continue to be needed to increase the capacity of the railway if the recurrence of severe bottlenecks is to be avoided. Motive Power 3.51 Probably the single most important issue facing the railways at this point is the choice of motive power. Slow progress has been made in replacing steam which still powers 78% of the locomotives. The installed capacity to manufacture diesel locomotives is not being fully utilized in part because of technical problems which, in turn, reduce the operational availability of the locomotives which have a bad-order ratio of around 16% for design and quality reasons. 3.52 Electrification of the Chinese railways has been slow. Even though the decision to begin electrifying the first section of line between Baoji and Chengdu was taken in 1958 and some trains started running in the early 1960s, full electric operation was not achieved until 1975. Besides electric power shortages, there have been technical problems with the locomotives as well as with the lines, particularly interferences with signalling and telecommunica- tions. However, the main problem is the high investment cost involved. 3.53 The issue of locomotive power choice is a complex one involving economic, technical, social and financial implications that are not limited to the internal aspects of railway management and operations. There are spill- over effects into the electricity supply, petroleum and coal producing indus- tries as well as relative environmental, labor and national security aspects. Steam power is clearly less energy efficient than diesel or electric which are about equally energy efficient. Steam, however, generates more employment in coal production and train operations, but has limited operational capabilities - 356 - in mountainous areas, tunnels and deserts. In view of China being potentially rich in hydropower and less so in petroleum, electrification offers energy independence, relative operating cheapness but higher initial capital outlays than diesel and longer gestation periods in becoming operational. Any economic analysis must recognize the trade-offs involved and correctly shadow-price inputs such as labor and the alternative energy types. In the longer run, electrification is probably the solution for heavy traffic lines, but at this point the Chinese railways-do not seem to have a firm plan for modernizing motive power. Line electrification is proceeding but in an apparently disjointed manner. To maximize the impact of the increased amounts of electric traction needed a detailed plan should be developed which, among other things, would cover the production of modern, efficient locomotives suitable for the operating conditions of the system as well as coordinated line improvements where these are justified. Such a plan should also include a strategy for the use of diesel in the short to medium term as a step toward the probable longer run electrification of large parts of the system. Operations 3.54 The Chinese railway has.a high level of utilization of its equipment and infrastructure, but operations are extremely uniform. Equipment used for passenger service is the same for long distance services and for short distance commuting within the vicinity of large metropolitan areas. One consequence is that the capacity of passenger stations in the largest cities is somewhat restricted. The introduction of some flexibility and specialized equipment in both freight and passenger services could probably release some capacity in the system. On the passenger side, for example, push-pull equipment could increase station capacity allowing more train movements; on the freight side, the wider use of unit trains, the preblocking of trains and the use of through trains could ease some of the pressure on yards and stations. Tariffs and Costs 3.55 Without additional information, little can be said about this difficult area. Short distance tariffs do not appear to cover costs; unified tariffs throughout the c6untry imply regional cross-subsidization of railway users which, while they may have some desirable income distribution effects, have probably induced some uneconomic location decisions. 4. HIGHWAYS AND HIGHWAY TRANSPORT A. Introduction 4.01 Prior to 1949 little attention had been given to the development of highways and highway transport, particularly in areas away from the coast. At the establishment of the People's Republic, there were only 80,000 km of - 357 - motorable roads in all of China, and, of these, about half were earth roads, the rest surfaced with gravel. They were planned not to compete with the railways but to supplement them. Road building was one of the mass projects to which millions of peasants were assigned during the Great Leap Forward. By 1979 the road network had grown nearly elevenfold to 870,000 km. This consti- tutes an average annual addition of more than 25,000 km, or a growth rate of nearly 9% p.a. Motor vehicle transportation has been growing at an even faster rate, since 1975 at an average 14.5% p.a. These developments have been of significance in improving local commerce and the postal service, and in unifying the country. Time savings have been significant, though discomfort often remains since about 45% of the network is unimproved earth roads. Markets have been widened and output formerly unsaleable has been marketed. Good roads and effective government have gone together. 4.02 Despite the progress of the past 30 years and the fact that China's road network is now about the sixth largest in the world, it is still only 60% as large as that of India or Brazil or roughly equal to that of Canada or Australia. The roads and road transport situation in China today can only be characterized as underdeveloped. The total of 876,000 km constitutes approxi- mately 9.4 km per 10,000 population or 91 km per thousand sq km area; compara- tive figures for India are 16.1 and 293 km, and for Brazil 130 and 168 km, respectively, thus reflecting the underdeveloped state of the network. In Sichuan province alone, for more than 10 million people in 1,100 communes the nearest road is more than 30 km away (which distance can only be traversed by animal or on foot); in China as a whole more than 5,000 communes and 300,000 production brigades are said to have no road access. Moreover, existing roads are generally of low standard in terms of alignment, bridge design and especially pavement condition and strength. Everywhere motor vehicles are hindered by slow-moving vehicles and pedestrians. The number of motor vehicles per person is considerably less in China than in India. Most vehicles are of outmoded World War II design which have high costs of operation, including excessive fuel consumption. Roads carry only about 28% of tonnage or less than 3% of ton-kilometerage in China, compared to more than 34% and 18% in India, and 80% and 71% in Brazil, respectively. The new economic policies, if allowed to develop strongly, seem likely to have a profound impact on the costs and structure of the road transport industry in China, and to some degree on the role of highways vis-a-vis railways, by inducing more efficient utilization of the vehicle fleet, reducing necessary empty running and transshipment costs, and diverting short-haul traffic from the railway. - 358 - B. Road Institutions, Organization and Management Overall Organization 4.03 The Highways Bureau (HB) of the Ministry of Communications (MOC) is formally responsible for the planning of trunk roads, and it also operates some road transport services. The design, construction and maintenance of trunk roads are the responsibility of the Provincial Transport Bureaus (PTB); the PTBs also operate road transport services. Two characteristics of the roads organization in China are noteworthy: (a) the same governmental agencies (at the central, provincial and lower levels) which construct and maintain the road infrastructure, as pointed out above, also operate public road transport services; and (b) the role of the central government in the direct planning, financing and administration of road and road transport services is relatively minor, with the primary responsibilities being carried by the provincial and lower levels of government. 4.04 Each of these characteristics offers advantages and opportunities but also entails weaknesses. Properly exploited, the integration of infrastructure and road haulage functions in the same administration can provide a better overall perception of priorities among new investments, maintenance of existing infrastructure and road user costs. It can also contribute, however to forces favoring restriction of competition and high tariffs, thus leading to excess capacity and high costs of road transport. This may have happened in China, as tariffs appear to have been set at relatively high levels to allow for a large profit margin by the PTBs, thus encouraging enterprises to buy their own vehicles, while regulations prohibi- ted the use of these vehicles in competition with the PTBs for other haulage. 4.05 A high degree of decentralization is to be expected in administering the road system, and especially in operating transport services, in a country where the area and population of many provinces exceed those of entire nations. What is surprising, however, is the limited role of the central government since the early 1960s in planning, research and, most importantly, the direct financing of development of the highway system. The central government reportedly played a much more active role in the rapid build up of highways during the 1950s, particularly in an effort to relieve some of the burden on the poor condition railway and to open up southwest China. Subse- quently, however, responsibility for roads was delegated to the provinces and lower levels of government such as counties and communes, and the staffing of the Highway Bureau was reduced to less than one tenth its former size of 400. Apparently the total expenditures on roads also declined, since the reduction - 359 - in central government outlays was not fully compensated by the provinces and lower levels. In any event, the PTBs now play the leading role in planning, financing, design and construction of roads as well as in providing assistance in all these facets to the lower levels of government. Planning 4.06 A formal highway planning process has been developed at the central level, although it is not clear how technically advanced or effective the process is. The central government contributes only a small proportion of total road expenditures, but exercises influence in various ways. Provinces and municipalities prepare their own highway plans within the framework of the central plan. 4.07 The provincial transport bureaus and the MOC are presently preparing medium- or long-term plans in line with the national readjustment policy. The PTB plans are to be approved by the Provincial Planning Commission and submit- ted as a matter of record to the MOC. For large and medium-sized projects, it is necessary to ask the State Planning Commission for approval. In 1981, the three Highway Survey and Design Institutes under MOC will undertake the feasi- bility studies for some major new projects. Design and Supervision of Construction 4.08 While the MOC determines overall road design standards, the specific field engineering designs are normally prepared by Design Institutes of the PTBs. The PTBs also provide the designs for roads and technical assistance in their construction to the lower levels of government within the provinces concerned. For major projects, the Design Institute provides staff for construction work, although the PTB is generally responsible for supervising construction. Construction and Maintenance 4.09 Construction works, including those on national highways, are executed by the construction unit of the PTBs or relevant lower level of government. The HB is responsible for the appraisal of design and supervision of construction of major projects, while highway bureaus of local governments are responsible for minor projects. In 1980, the MOC established the China Overseas Roads and Bridges Engineering and Construction Company which has been active in a number of other developing member countries of the Bank. - 360 - 4.10 Maintenance of existing roads is typically the responsibility of the PTB. Maintenance activities appear to receive first priority, are well orga- nized and are funded through road maintenance taxes, although a part of road maintenance taxes are also used for construction (para. 4.40). Training 4.11 While more than 3 million people are engaged in road infrastructure activities in China, only about 40,000 have had any significant technical training. The MOC considers the technical proficiency of many of these exist- ing technical staff to be inadequate and efforts are being made to overcome the situation. While one national institute focusses exclusively on training highway engineers (Xian Highway Institute), eight universities have highway engineering departments, and each province has its own institute for voca- tional and technical training of lower level highway staff. Technical man- power planning for the highway sector is only now resuming in the aftermath of the turbulent years of the late 1960s and early 1970s. 4.12 The Xian Highway Institute, originally established in 1958, current- ly has a staff of 1,600 (450 teachers) and 2,500 students in a 4-year training program which offers 11 specialties, including mechanical and automotive engineering, finance and economics as well as traditional civil engineering courses. Some of the faculty also engage in research part-time. The Insti- tute, which was affected by the Cultural Revolution, appears, however, to suffer from severe budgetary constraints and shortages of adequate facilities, laboratories and computational equipment and libraries, which limit its potentially significant contribution to rising professional standards in the highway sector. C. The Road Network 4.13 As shown in Table 4.1, some 92,000 km of roads were added to the network between 1975 and 1979, or approximately 23,000 km per year. Of the 1979 network, 151,000 km were blacktopped. - 361 - Table 4.1: HIGHWAYS NETWORK ('000 km) 1975 1976 1977 1978/b 1979 Total Roads (nonurban) 784 823 856 890 876 Paved (full asphalt 92 108 126 143 151 or brick) More than 2 lanes - - - - 0.188 2 lanes - - - - 118 Less than 2 lanes - - - - 33 Unpaved 692 716 729 746 725 Improved/a 405 424 435 456 496 Earth surface 287 292 294 290 229 /a Occasionally passable in rainy season but not up to all-weather standard. /b Preliminary results of a 1979 road survey indicate that the 1978 estimates of road mileage may have been too high. Source: Ministry of Communications. 4.14 While its importance in the transport scene is increasing, the highway network is very much a system of feeder roads into the railways. However, in western China, due to the sparse railway network, long distance transport relies mainly on highways. D. Design Standards and Practices Geometric Standards 4.15 From the geometric standards of classified highways in China shown in Table 4.2, it can be seen that design speeds are severely restricted for road classes 3 and 4 which constitute 98% of the classified network, and they are moderately restricted for the remaining 2% (11,000 km) of class 2 roads. Class 1 may be ignored since only 188 km exist. - 362 - Table 4.2: HIGHWAY GEOMETRIC STANDARDS Class 1 Class 2 Class 3 Class 4 Plain Hilly Plain Hilly Plain Hilly Plain Hilly area area area area Design travel speed km/hr 120 80 40 60 20 40 20 Subgrade width (m) >23 10-12 8.5 8.5 7.5 4.5 6.5 Surface width (m) 2x7.5 7-9 7 7 6 3.5 3.5 Min. radius of horizontal curves (m) 600 250 50 125 25 50 15 Non super-elevated Radius of horizontal curve (m) 2,000 1,000 250 500 150 250 100 Max. gradient (%) 4 5 7 6 8 8 9 Min. passing sight distance 160 75 110 40 75 34 40 20 Source: Ministry of Communications. 4.16 On most roads, particularly in eastern China and near large towns, motor vehicles seldom achieve the design speed due to the mixed volumes of slow-moving tractor-type vehicles, bicycles, hand-carts, animals and pedestrians. On a few roads (primarily within the large cities) efforts have been made to separate traffic streams by providing separate lanes. These are clearly helpful and given the traffic volumes, no other solution is apparent, although costs are high since road width requirements are often doubled. More commonly, roadside obstructions - and particularly trees, which have become a major feature of nontransport policy - decrease the effective width of the road and constitute serious safety hazards. Pavement Standards 4.17 Possibly the most notable deficiencies of China's road system are the low standard of pavements and the limited extent of the paved network. This is partly due to a shortage of good materials, particularly asphaltic binders, and in some areas the absence of natural gravel or rock. It is also due, in part, to weak design practices and quality control in construction. Chinese crude petroleum has a high paraffin content and yields only low quantities of rather poor quality asphaltic binders. As a result, the great majority of petroleum-based pavements in China are not true asphalts as found in most countries, but rather a type of oiled gravel made from the residual oils from the refining process. Experience in China and elsewhere (e.g. Norway) has shown that these residual oil pavements are reasonably satis- factory for low pavement loadings, but they have limited strength and cannot normally be used for highways with heavy traffic. - 363 - 4.18 High traffic volume routes are normally surfaced in China with asphalts (sometimes imported, e.g. from Albania) or, in some cases, and primarily in the cities, with portland cement concretes. The portland cement concrete pavements, some of which appeared quite old, generally provided a much higher quality of riding surface than much newer asphalt roads. However, portland cement is said to be in short supply and its costs prohibitive. Given the problem of road surfacing, the limited use of coal tar in road-making in China - despite the abundance of the raw material is not easily understood. 4.19 The use of continuously graded aggregates is shunned in road surface construction in China in favor of gap-graded mixtures, stone soling and parti- cularly macadam, which is used extensively in blacktopped roads (most commonly in an oil-residual penetration). Such materials and designs are more versa- tile and can be manufactured and laid using either manual or equipment methods or a combination thereof. Mud-bound macadam (MBM) is also used extensively as a final surface; about 240,000 km of MBM-surfaced roads are in service today. The MBM-surfaced roads were substantially rougher than a natural gravel road would normally be. 4.20 With the exception of portland cement concretes, few of the road pavements observed in China could long withstand the officially promulgated 13-ton axle-load design standard. Although axle-load weighing surveys have not been done, it would seem probable that few truck axle-loads would exceed 6 tons because of the vehicle technology in use. Fortunately also, even animal-drawn vehicles all appear to have pneumatic tires, thus avoiding the extreme pavement stresses generated by steel-rimmed wheels common in some other Asian countries. E. Construction Technology, Standards and Costs 4.21 Construction is executed by departmental forces ("force account") using in many instances (particularly in the cities) a relatively capital- intensive technology; indeed, several civil construction activities observed in the cities were as mechanized as those in North America. Bulldozers, loaders, small tipping carriers, rock crushers and small to medium-sized asphalt mixing plants are commonly observed, as are the ubiquitous steel- wheeled rollers. Only one mechanical paver, however, and no motor-graders were observed by the mission, although such equipment is said to be manufac- tured in China. A common view among highway engineers in China is that more road construction machinery is needed, but no cost comparisons with more tra- ditional techniques were available. In the context where civil works are all executed by force account, questions of cost effectiveness may not have been a primary consideration in the choice of technology. The policy shift toward modernization through the use of heavy equipment has doubtlessly been - 364 - reinforced by the severe underpricing of capital in the Chinese economy. Based on experience in India and other similar countries, and considering that the prevailing wage for unskilled/semiskilled construction workers is $1.25 per day (Y 40 per month plus 20% fringe benefits), it seems likely that some construction activities already mechanized in China, e.g. earthworks excavation, materials haulage over short distances and possibly stone crushing, could be done more economically by manual methods. 4.22 Comprehensive data on highway construction costs were not available, but some examples from the provinces visited are given in Table 4.3. Compared to costs in other countries they appear relatively low, although it is not clear how meaningful such comparisons are considering pricing policies fol- lowed. It is known, for example, that no interest and very low depreciation are normally charged for capital goods, although the original purchase price is likely to be set high if practices in other economic sectors apply here also. For the one province (Sichuan) where the composition of costs was available, the data for new construction costs indicate a higher proportion to materials and a lower proportion to equipment and labor when compared with other countries. The prices of construction equipment (other than trucks, Table 4.3) were not available. 4.23 Quality control in road construction is weak in some aspects, for example, lack of temperature control in bitumen work, unevenness in spreading of aggregates, and uneven riding surfaces. This is due to management problems and shortages of skilled staff and modern construction equipment. F. Maintenance Technology, Standards and Costs 4.24 Road maintenance is well organized in China and currently absorbs much of the attention and resources of the provincial and other road autho- rities. As seen from Table 4.3, expenditures in some regions are of the order of $1,400-1,500 (Y 2,000-2,200) per kilometer per year. Taking into account the relatively low-wage environment in China, the limited use of equipment, the apparently effective use made of maintenance funds, and the generally light traffic, the above maintenance costs appear to be slightly high compared with other countries. It may be that in some cases excessive maintenance efforts are being made to preserve badly deteriorated pavements which could more economically be replaced. In Sichuan maintenance requires an average of one ton of asphalt per kilometer of blacktop road per year, thus absorbing the bulk of the available supplies of that scarce commodity. 4.25 Maintenance work is more labor intensive than construction; rela- tively little equipment is involved (primarily hand tools, portable bitumen heaters, and trucks for long distance haulage of materials). The labor force is organized in basic units of 13 to 14 people working 10 km near their homes so they can easily walk to work and costly transport is avoided. Table 4.3: ILLUSTRATIVE DATA ON COSTS OF HIGHWAY CONSTRUCTION, IMPROVEMENTS AND MAINTENANCE Costs Composition of Costs (%) Activity Unit (Y '000) ($ '000) Admin. Labor Equip. Material Land & Source other New Construction Class 2 Road (flat terrain) km 130 88 - - - - - Shaanxi PTB Class 2 Road (mtn. terrain) km 230 156 - - - - - Shaanxi PTB Class 2 Road incl. blacktop km 250-300 169-203 - - - - - Jiangsu PTB Class 1 Road, restricted access km 1,250 845 - - - - - Jiangsu PTB Class 1 Road (excl. land & structures) km 600 406 - - - - - Shanghai TB New asphalt pavement km 48 32 11 6 5 75 3 Sichuan PTB Bridge, arch type m 19.2 13 14 6 6 43 31 Sichuan PTB Bridge, arch type m 3.4 2.3 - - - - - Sichuan PTB O Bridge m 3-4 2-2.7 - - - - - Jiangsu PTB Road Improvements Existing low standard road to class 3 (excl. pavement) km 105 71 24 30 5 28 13 Sichuan PTB Road Maintenance Blacktop roads km 2.1 2.4 12 42 7 39 - Sichuan PTB Gravel roads km 2.2 1.5 15 58 8 19 - Sichuan PTB Overall avg. (blacktop roads 50% more than gravel roads) km 2 1.4 - - - - - Jiangsu PTB Materials & Supplies Asphaltic cement ton 100-200 68-135 - - - - - Jiangsu PTB Residual oils ton 100 67 - - - - - Jiangsu PTB Diesel oil US gal 1.51 1.02 - - - - - Shaanxi PTB Gasoline US gal 2.26 1.53 - - - - - Shaanxi PTB Truck, 8 ton (non-tipping) unit 38,000 25,700 - - - - - Sichuan PTB - 366 - 4.26 Much maintenance activity and the results of recent maintenance were observed throughout the areas visited by the mission. Pavement potholes were properly treated and patched, and drainage channels appeared to be regularly cleared. However, apparently because of the poor quality of materials and standards of construction, road riding surfaces were irregular and often very rough. It seems likely that the costs of maintaining roads (and a fortiori the costs of vehicle operation) could be reduced if pavements were constructed to higher standards initially. G. Road Traffic: Present and Future Trends Traffic Counting 4.27 Some road traffic counting was done during the 1950s but then lapsed. In 1979 a detailed and systematic system of traffic counting was introduced for all trunk roads, with 24-hour counts taking place 3 times per month throughout the year, including nonmotorized vehicles. Similar counts are also done for most provincial and some lower-class routes. This is proba- bly the most comprehensive road traffic information system anywhere in the world, although it should be possible through application of sampling proce- dures to reduce the effort without sacrificing quality; in fact, some of the effort might be more productive if transferred to origin-destination surveys, which are apparently not now done except in some large cities. Existing Traffic and Future Trends 4.28 Table 4.4 depicts total motor vehicle volumes on some major trunk routes that are now being proposed for upgrading; in addition, these routes also carry high volumes of slow-moving vehicles (agricultural tractors and trailers, hand carts) and pedestrians. 4.29 In recent years (since 1979) motor traffic on the trunk highways has grown at a very high overall average of 15% p.a., which is about the same rate of growth as the vehicle fleet, 14.5% p.a. This implies traffic volumes that double in less than five years. Traffic growth has been particularly rapid near the major cities where it averages 18-19% p.a., and in Sichuan Province passenger traffic is reported to have been growing at the extraordinary rate of nearly 24% p.a., although nationwide data indicate that the nonurban bus fleet has only been growing at 14.5%. In Jiangsu Province motor traffic (as distinct from vehicle numbers registered) has grown at only 8% p.a. since 1978. Jiangsu Province shares the nationwide characteristic that haulage on own-account (i.e. enterprise vehicles) has grown much more rapidly than public carrier service (about 4.5% p.a. in terms of vehicle fleet), although own-account vehicles do substantially fewer kilometers (and still fewer ton-kilometers) per annum than do public carrier vehicles. - 367 - Table 4.4: TRAFFIC VOLUMES ON SELECTED TRUNK HIGHWAYS (1979) Annual average daily traffic Route (motor vehicles only) /a Beijing-Tianjin-Tanggu 6,000 Nanjing-Hangzhou-Shanghai 4,000 Chengdu-Chongqing 3,000 Guangzhou-Shenzhen (Hong Kong) 4,000 Shenyang-Dalian 3,000 Wulumuqi (Urumqi)-Dushanzi 4,000 Jinan-Qingdao 3,000 /a In addition substantial volumes of slow-moving traffic and pedestrians are carried. Source: Ministry of Communications. 4.30 Congestion which is severe at times is already apparent on many roads, particularly around the cities and in the larger villages, despite the relatively low volumes of motor vehicles. This is due to the mixed nature of the traffic flow. Slow moving vehicles consume from five to ten times as much road capacity as fast-moving vehicles both because of their own slow speed and their hindrance to faster vehicles. Although quantitative evidence is lack- ing, informed opinion in China is that strictly local movements (formerly largely done by human motive power) are being increasingly mechanized. This releases labor from transport for use in agriculture proper. The transforma- tion is largely to small (12-HP) tiller-type tractors that draw trailers capable of carrying 500-1,000 kg at speeds of 10 kph, which does little to improve traffic flow characteristics. 4.31 With a continuation (let alone an increase) of the present high rates of traffic growth and roughly the same traffic composition, many seg- ments of the existing trunk network can be expected to be saturated within the next five years. Solutions of what will undoubtedly be a severe problem will require combinations of such measures as traffic separation through road widening; the addition of parallel, restricted-access links in high-volume - 368 - corridors; construction of bypasses around the cities, towns and villages; and substitution of more small (1/2-1 ton) pickup trucks for slow-moving tractor vehicle movements. The prospects for elimination of the multipurpose agricul- tural and transport tractor, however, appear limited in the short run, given their importance as prime movers in the fields. H. The Vehicle Fleet 4.32 Several features of the Chinese motor vehicle population are strik- ing. First, the extremely low number of passenger cars, roughly 1 car per 10,000 population or less than 1/10 that of India and 1/500 that of Brazil. Secondly, the almost total absence of trucks with more than 8 ton capacity. Thirdly, the very small number of light trucks in the 1/2-1 ton range. And finally, the seriously outmoded designs, together with the fact that the large majority of trucks are gasoline rather than diesel powered. 4.33 As shown in Table 4.5, China manufactured 185,700 vehicles (including cars) in 1979, while approximately 20,000 vehicles, or roughly 10%, were imported./l 4.34 The 182,000 trucks (including jeeps) produced in 1979 make China about the tenth largest commercial vehicles producer in the world, ahead of Italy for example. If truck production continues at recent rates of growth, by 1985 or so, China would have an output comparable to that of Canada or the UK in 1975. Some 30 motor vehicle plants are reported to be in operation, but only four have any significant production capacity. The largest plant is Changchun No. 1 in the northeast (Jilin Province) and accounts for about one third of total production. It is an old plant built with Soviet aid and manufactures mainly the 4 or 4.5 ton Liberation trucks which are based on a Soviet model (which in turn was based on World War II vintage Ford trucks). The fuel efficiency of this vehicle is low, but it will operate on low octane fuel. Larger trucks (10-12 tons) have been produced with Czechoslovak aid and many Japanese, French and Romanian manufactured trucks are in circulation, but the makes of the two latter countries are declining in use since they were imported mostly in the early 1970s. /1 The difference between the total number of vehicles manufactured and imported (185,700 + 20,000 = 205,700) and the net addition to stock (197,000), or 8,700, would presumably constitute replacement of old vehicles. This replacement rate is low, but is consistent with the unusually long vehicle life (said to average 20 years) and the fact that the present fleet has been built up rapidly over recent years. - 369 - Table 4.5: MOTOR VEHICLES MANUFACTURED IN CHINA, 1979 Type Passenger cars 4,000 Jeeps & 2-ton trucks 25,000 Trucks - 2-1/2 tons 15,000 4 tons 60,000 5 tons 13,000 7 tons 500 8 tons 3,500 10 tons 300 15 tons 500 Subtotal by major plants 121,800 Subtotal in minor plants (including dumpers 3-1/2 - 100 ton) 63,900 Total 185,700 Source: First Ministry of Machine Building, Motor Vehicles Bureau. - 370 - 4.35 It is striking that despite the proliferation of models (and con- comitant difficulties with spare parts) - 38 different models were locally manufactured and several other models were imported in 1979 - trucks neither larger than 8-ton nor smaller than 2-ton capacity are readily available. In 1979 only 300 10-ton trucks and 500 15-ton trucks were produced together with less than 300 dump trucks (including heavy dumpers up to 100 tons for mining operations). The information available indicates no trucks below 2-ton capacity are regularly manufactured in China. While a greater concentration on fewer models covering a wider range of choices would appear desirable, the introduction of heavier trucks would have to be synchronized with a pavement and bridge strengthening program to avoid rapid destruction of existing roads and bridges. Significant investment in the vehicle manufacturing sector would also be required. Since many of the economies of large size vehicles are based on savings of drivers' wages, a major cost element in high-wage economies but much less significant in China, it is likely that very large vehicles will play a smaller role in China, predominantly in specialized operations such as movement of oceangoing containers. I. Road Transport Services Organization 4.36 China's public carrier road freight haulage plays a smaller role and enterprises' own-account haulage a larger role than in other countries. Public carrier services have been completely monopolized until recently by the respective government transport bureaus at the national, provincial, regional, county and municipal levels; tariffs have been set at high levels and (at least in some provinces) substantial transshipment rather than door-to-door delivery has occurred when cargo crossed the jurisdictional boundaries of different bureaus./ 4.37 Faced with high tariffs and a sometimes poor service of public carrier vehicles, manufacturing or production enterprises have had strong incentives to purchase their own vehicle(s). The fleet of own-account vehicles as a result has grown very rapidly. Whereas, for example, public carriers (transport bureaus) owned 70% of the total vehicle fleet in 1949 and enterprises' own-account vehicles accounted for only 30%, by 1979 public carriers owned only 14% and enterprises 86% of the much larger fleet of vehicles. Nevertheless, public carriers still accounted for two thirds of the ton-km moved by truck. Own-account vehicles have been prevented from engaging in 'for-hire' activities. The result has been that many empty vehicle /1 Jiangsu Provincial Transport Bureau officials reported that trans- shipment has normally been avoided in that province and Sichuan Provincial Transport Bureau officials indicated that under the new economic policies, less of such transshipment is now occurring there. - 371 - kilometers were run which thus increased transport costs and fuel consumption, and took up valuable roadway space. It is reported, however, that many of these restrictive and wasteful practices are beginning to disappear under the effects of the new economic policies. This should ease some of the pressure on the industry. Road Transport Costs and Tariffs 4.38 Table 4.6 relates information available on road trucking costs and tariffs. Public carrier tariffs, which have been little revised since 1966, generally exceed costs by a wide margin; one transport bureau reported an overall surplus of 30% over costs in 1979. Compared to railway rates, truck- ing tariffs for haul distances under 50 km are approximately 6 times as great; for haulage distances of 50-100 km and over 100 km, trucking tariffs are 9-fold and 19-fold, respectively, of competing railway tariffs; in fact, at these rate differentials there is little truck public-carrier competition with railways. (However, railway short-haul tariffs do not cover costs, and it is understood a revision of railway tariffs is being planned to correct this anomaly.) J. Road Financing 4.39 During the 1950s road construction was financed mainly by the cen- tral government (approximately 3% of the total capital construction budget). Subsequently the burden of financing road construction was shifted largely to the provinces and lower levels of government. The roads share in the total capital construction budget dropped to 1.2% (1979), most of which came from the provincial and lower levels of government. Road maintenance has always been the responsibility of local governments. 4.40 A provincial road "maintenance" tax is the predominant source of revenues for both road construction and maintenance. The level of this ear- marked tax varies from province to province, but generally follows the common structure that public-carrier vehicles are taxed as a percentage typically 10-12.5% of their gross revenue turnover while enterprise (own account) vehicles are taxed at a fixed rate per capacity ton - typically Y 70-96 per ton per month. These rates amount to Y 3,360-4,608 or the equivalent of $2,270-3,114 per year for a 4-ton truck and twice that for an 8-ton truck. These are high as compared with the levels in many developing countries. No explicitly identified taxes appear to be levied on purchases of fuel, tires, parts or vehicles, although it is not clear what taxes may be implicitly incorporated in the prices of these goods. - 372 - Table 4.6: ROAD TRANSPORT FINANCIAL COSTS AND TARIFFS Y $ Per freight ton-km: Cost 0.154 0.104 Tariff 0.18-0.19 over 25 km 0.12-0.13 0.23-2.00 under 25 km 0.16-1.35 Per passenger-km: Cost 0.149 Purchase price of fuel Gasoline 0.60 per liter 1.53 per US gal Diesel 0.40 per liter 1.02 per US gal Fuel consumption (fleetwide avg.)* Gasoline 0.0906 liter/capacity ton-km Diesel 0.0730 liter/capacity ton-km Purchase price of 8-ton vehicle * - Chinese manuf. 38,000 25,675 - Imported 55,000 37,162 Composition of Operating Costs Sichuan * Shanghai ** (%) (%) Fuel 28.9 22 Tires 9.7 7 Vehicle repairs 15.2 23 Vehicle depreciation 5.4 5 Labor 5.6 17 Road use taxes 15.6 7 Administration & misc. 15.6 19 100.0 100 Sources: * Sichuan Provincial Transport Bureau. ** Shanghai Transport Bureau. - 373 - 4.41 It was estimated that in 1979 provincial road maintenance tax revenues totalled Y 2,836 million, mostly used for improvement of existing roads, administration and maintenance. The expenditure pattern varies from one province to another, e.g. Sichuan was reported to spend 65% of revenues for maintenance and only 32% for reconstruction, whereas Jiangsu reported only 35% on maintenance and 53% on major reconstruction. In addition, the Government contributed Y 600 million for road investments, and contributions (largely in kind) from the counties and communes were Y 200-300 million for construction of 16,000 km of local roads. Capital Improvements Program 4.42 The stated priorities of the Highway Bureau are: (a) to upgrade certain key import-export and trunk routes as listed in Table 4.4; (b) to complete the network of trunk roads linking the provincial capitals and other major cities; (c) to improve the main approach roads to some 30 major cities; and (d) to provide and replace selected existing bridges and ferries. 4.43 In Sichuan Province, for example, the PTBs proposed road investment program is in the order of Y 225-270 million per year for the next 10 years, with approximately 28% being for improvements (mainly for approach roads to the main cities, but also rural access roads); 20% for construction of a new road linking Chengdu to Chongqing; 16% for road pavements; and 35% for bridge construction and replacement. However, financing is definitely identified for only about one third of this program, or Y 80 million per year - all but a small fraction coming from the provincial road maintenance tax, of which approximately 35% is used for new investments and improvements. K. Conclusions And Recommendations Problem Areas 4.44 Congestion and Capacity Constraints. Due to the mixed traffic of large numbers of slow-moving motor, animal and human drawn vehicles and of pedestrians and bicycles, journey speeds for trucks and buses are low and journey times quite high on almost all roads. Significant congestion, lasting over several hours of the day, is already evident on several main trunk routes (Table 4.4), on approach roads to some major cities and in the larger towns and villages. With the steady and rapid growth of motor traffic and continu- ing presence of slow-moving vehicles, road congestion will increase and spread over wider segments of the network for longer hours of the day. - 374 - 4.45 Under present operating conditions and practices, the routes with the heaviest traffic today are unlikely to be able to carry effectively the doubling of traffic envisaged by the mid-1980s. The nature of the road net- work and characteristics of the traffic are such that alternative routings to avoid congested segments are not easily available. A combination of many measures will be required to cope with and avert congestion, which may become a critical bottleneck as the economy seeks to expand its output of light manufactured and consumer goods while, at the same time, introducing greater specialization in manufacturing and in agriculture - tendencies which will require increasing reliance on road transport. A greater night-time use of the roads, more separation of slow-moving traffic, increased road widenings, the construction of more parallel routes and town bypasses will all be required to cope with the anticipated growth of traffic even if, as now, road transport continues to be limited to essentially short-haul functions. If road transport were to grow in China to perform the role it does in most industrialized and large developing economies, then a substantially larger program of road investments would be required. What, in fact, can be envisaged as the most appropriate answer to China's unique situation is a road system that in density and condition is somewhere in between what exists today and the more extensive systems of other countries. 4.46 Road Pavements. There are some 240,000 km of road with a mud-bound macadam surface with an extremely rough riding characteristic (often rougher than a natural gravel surface). Of these, there are some 80,000 km with traffic already in excess of 500 vehicles per day. Failure to blacktop these roads is causing vehicle operating costs (particularly tire wear, vehicle repairs and vehicle depreciation) far in excess of the costs of paving. 4.47 Of the 150,000 km (or 17% of the network) that are blacktopped, the vast majority are apparently of low strength and low riding quality. The reasons for this - primarily poor quality bitumens and poor quality control in construction - have been discussed above (para. 4.23). Whatever the ulti- mate remedy, it seems likely that major investments in road pavement streng- thening will be required in the near future as these light pavements can be expected to deteriorate quickly with rapidly increasing traffic. In a few cases it appeared that excessive maintenance efforts were already being made to preserve badly deteriorated pavements which should more economically be replaced. For China to take advantage of the economies offered by modern heavy trucks, still further expenditures to achieve substantially stronger pavements would be required. Although the potential benefits of larger vehicles are less in a low-wage economy, the marginal costs of strengthening to higher standard are quite low, and anticipated traffic growth very high, so that a systematic analysis of the benefits and costs of introducing heavier vehicles is needed. However, it seems likely that somewhat higher standard pavements would be a wise investment in any case. - 375 - 4.48 Bridges. The majority of bridges in China have load restrictions of less than 15 tons, with many being restricted to less than 10 tons; in addi- tion, there are many tens of thousands of meters of bridges which are offi- cially classified as dangerous. The introduction of much heavier vehicles would require substantial investments in bridges, but since many existing bridges must be replaced - and many more are yet to be built as the road network is developed - and considering that the marginal costs of constructing a bridge to much higher strength is very small, it would seem desirable that bridge standards (just as pavement standards) should be upgraded in China. 4.49 Access to Remote Areas. Many millions of people still are not connected to the road network, particularly in the mountainous regions. It is not clear what the purely economic return from investments to establish such connections would be. These would need examining case by case. The benefits, however, are likely to be considerable for at least some parts of such vast areas, particularly if a heavy social weight is attached by Chinese society to improved access to educational and health facilities as well as market access and administrative integration. The regions and peoples affected, though a relatively small proportion of the Chinese nation, nonetheless exceed by wide margins the total populations and land areas of many independent nations in the world. Their needs and potentials should not be lost from sight when put in percentage terms. 4.50 Vehicle Design, Fleet Capacity and Utilization. The design of both Chinese-manufactured and many imported vehicles is outmoded. There is a pro- liferation of models and of the spare parts required, but as yet a restricted choice in the size of vehicles (most notably the absence of small utility trucks and vehicles larger than 8 tons). The result is that vehicle operating costs, including excessive fuel consumption, are higher than they need be and costly custom manufacture is necessary to provide needed spare parts. 4.51 Due to many factors, including the high tariffs of public carriers and the underpricing of capital, there is currently excess capacity in the trucking fleet. Transport by public carriers has grown much more slowly than own-account haulage. The vehicle fleet, particularly own-account trucks, has increased dramatically, in fact more rapidly than traffic volume. Own-account vehicles now account for approximately 85% of the motor vehicle fleet, yet reportedly carry only one third of total truck tonnage. With the relaxation of restrictions on own-account vehicles to offer for-hire services, it is to be anticipated that there will be strong pressure on the revenues of the public carriers as competition drives down the high price of road haulage. This should promote a more effective utilization of the vehicle fleet, and reduce the incentives for many enterprises to own vehicles. It should also reduce by a considerable amount the empty running of vehicles, thereby reducing vehicle operating costs, including fuel consumption, and the congestion of road space. - 376 - 4.52 Intermodal Allocation. The average haul distances on China's roads are extremely low; in Sichuan Province the average load of public carriers is 59.5 km and Jiangsu Province about 40 km. While the role of trucking in long-distance transport in China is likely to remain limited, it is evident that the railways are now carrying much short-haul traffic that could better be moved by road transport. The proposed revision of railway rates so that its tariffs at least cover the costs of short-haul movements is likely to encourage some rationalization of modal split along more economic patterns. A shift of only 10% of railway traffic (or roughly one third of that moving less than 100 km) would constitute more than a doubling of motor traffic on the highway system. This would require substantial investments to expand capacity of the road infrastructure, but not (at least not initially) the vehicle fleet, assuming that more effective utilization of own-account vehicles is encouraged. 4.53 Planning and Information Systems. The present highway management information system is only gradually being established. The preparation of a systematic and comprehensive program, based on information and data obtained through investigation, is still at an early stage. Evaluation of investment priorities has so far not been based on systematic and comparative analysis. The central government is not fully aware of many of the financial sources of local road construction projects. 4.54 Training, Design and Research. The highway engineering profession has not developed in China to the same degree as other professions and was also heavily affected by the turbulence of the Cultural Revolution. While the geometric design for the types of roads now being constructed in China appears, in most respects, to be satisfactory, pavement and bridge designs and materials could be substantially improved by the introduction and adaptation to local conditions of established designs, materials and procedures from other countries; this could be done effectively in the context of a small- scale program of applied research to ensure the most appropriate forms of local adaptation. 4.55 Improvement of quality control in construction, particularly in pavements, is badly needed; this must be addressed in the first instance by an expanded and strengthened educational program to train engineers and technicians. 4.56 Achievement of all of these objectives will require much greater numbers of trained personnel at the professional, technical and vocational levels. The one training institute visited, aimed at the professional level, appeared ill equipped in terms of libraries (particularly foreign professional literature), laboratories, equipment and other training and research facilities. A greatly expanded program of highway planning and engineering training at all levels seems essential. The process could be quickened and enriched at the professional level by the reciprocal exchange of faculty members with foreign universities and consulting firms. - 377 - A Strategy for Roads Development in China 4.57 Prognosis. Many of the major forces and factors that have led to the rapid development of modern highways and road transport in other countries - e.g. cheap energy supplies, high and fast rising disposable incomes which generated high levels of private motorization and abundant capital for construction of roads and purchase of vehicles - are absent in China today. Moreover, the large numbers of slow-moving vehicles and pedestrians impede traffic flow on the existing highway system, thus increasing vehicle operating costs and road investment requirements, making road transport a relatively more costly mode. At the same time, there has also been a clear policy preference in China of priority to the railway so that it could meet the long-haul transport needs of heavy industry. The Chinese railway is an effective carrier that offers an efficient means for large, long-haul transport movements within the limited corridors of its established trunk network. 4.58 The role of road transport in China may thus be expected to evolve differently from that of other countries. The demands for, and financial support of, high standard highways will be less because of the absence of the private motorist. Road transport competition with railways will be less for long-haul traffic than in other countries, in part because of weaknesses of the road system and in part, particularly in the near future, vehicle limitations. A planned, coordinated development of road transport should be aimed at complementing rather than replacing rail services, taking into account the real comparative advantages and costs of each mode. 4.59 Nevertheless, even allowing for the special circumstances of China the role of road transport in the future should be substantially greater than it is today. Even under past policies traffic flow on the highways has grown rapidly. Changes in the structure and special distribution of economic activities, brought about by the new economic policies and opportunities for enterprise initiative, are likely to generate traffic in consumer goods, light manufactures, manufactured components, and foodstuffs that are best suited to road transport in terms of their normal shipment patterns, size, handling requirements, etc. Also, some amounts of existing short-haul traffic on the railway are likely to be shifted to road transport when both rail and road tariffs are adjusted to reflect costs. 4.60 Significant sections of the existing road network will be unable to handle the increased volumes of traffic that may reasonably be expected to develop and, therefore, will require some major new investments. The alter- native solution of expanding railway or waterway capacity may be far more costly in individual cases. Large investments in strengthening existing roads and bridges are also likely to be necessary. In the effort to extend the road network as quickly as possible, light designs were adopted and these were not always well constructed. With the rapid growth of traffic and the aging of large segments of the network, substantial investment losses can be expected unless pavements are strengthened soon. - 378 - 4.61 Recommended Actions. Since the resources available are unlikely to meet even the most urgent and pressing demands - for investments to increase capacities in the major corridors, to link remote areas, to repair, resurface, rehabilitate, strengthen and maintain existing roads - planning procedures must be strengthened to permit a careful determination of overall priorities in the highway sector. The proposal to develop a capability for highway project feasibility studies at the three central government survey and design institutes is a useful first step. Highway project planning and investment analysis cannot, however, operate in isolation from broader analysis of transport sector priorities. 4.62 A number of major issues in transport and highway planning require resolution which can be done only after careful examination. Planning or applied research studies are recommended, therefore, in the following areas: (a) demand forecasting, including competing road and rail traffic; (b) costs and service characteristics of road transport (for input to multimodal comparative studies); (c) road transport pricing, user charges and financing mechanisms (to determine economically efficient tariffs and sources of road finance); (d) optimum road vehicle size and weights (balancing the costs of infrastructure against the benefits of larger vehicles); (e) the roads construction materials problem (including the possible large-scale use of coal tars); and (f) cost interrelationships among highway construction, maintenance and vehicle operating costs (to provide an empirical scientific basis for optimizing road design and maintenance standards). Appendix C provides a tentative assessment of the priority and resource requirements of these various studies. With the exception of the sixth, and possibly the fifth topic, very useful first studies could probably be completed after only a few man-months of investigation in each case. In the case of the sixth topic, highway cost interrelationships, the results of major studies in Brazil and India to be completed in 1982 should yield results which can partly be transferred to China. Further research would most appropriately be planned after a review of those studies. - 379 - 5. WATERBORNE TRANSPORT A. General Introduction 5.01 This section deals with ports, inland waterways and coastal and ocean shipping. After a general introduction to water transport as a whole, including broad issues, the various subsectors are presented in turn, each with a brief description followed by a more analytical or issues-oriented part. 5.02 Water transport is more important in China than in most countries. Historically, it provided the major means for goods transport. Inland naviga- tion canals, including the Grand Canal connecting Beijing with Hangzhou, were started well over 2000 years ago. Presently, the length of navigable waterways, with a usual depth of at least 1.0 m, is 57,000 km, or about the same as the length of China's rail network. China's coastline is 18,000 km long. 5.03 Despite their historical significance, waterways somewhat fell into disuse with the advent of rail transport. In 1952, only 14 million tons reportedly moved on inland and coastal waterways, about one tenth of the ton- nage moved by rail in that year. Even with ocean shipping in Chinese vessels included, freight carried totalled only 15 billion ton-km in 1952 and 42 bil- lion km in 1957. In recent years, however, water transport has increased in relative importance and has remained the second most important mode in China. In 1979, nearly 400 million tons (on modern vessels) moved on domestic waters (Table 5.1), a 28-fold growth from 1952. The freight volume of inland and coastal shipping, 139 million ton-km in 1979, was roughly one quarter of the railways' freight volume. Ocean shipping carried in Chinese vessels grew spectacularly to over 317 billion ton-km, based on an average freight haul of nearly 7,500 km (vs. 1,232 km in coastal and 170 km in inland shipping). This water transport volume grew at about 23% p.a. in 1952-57 and 8.3% p.a. in 1952-79. Together with traffic growth, there has been a large technolo- gical change in water transport. Before 1950, 70% of all goods carried by water (inland and coastal) were moved by junks with only 30% carried by powered vessels. In 1979 junks carried less than 8% of the goods and produced less than 3% of the ton-km (including ocean shipping). - 380 - Table 5.1: TOTAL WATER TRANSPORT VOLUME 1975 1976 1977 1978 1979 Tons (million) Inland - - - 327.6 321.2 Coastal - - - 68.7 68.6 Shanghai 30.9 33.4 36.6 38.3 36.4 Guangzhou 6.3 6.3 9.3 11.5 13.4 Others - - - 18.9 18.8 Ocean shipping - - - 36.6 42.5 Total 349.9 355.3 388.6 432.9 432.3 Ton-km (million) Inland - - - 51,338 54,535 Coastal - - - 77,903 84,502 Shanghai 30,728 34,182 38,063 41,657 44,285 Guangzhou 8,206 9,741 16,842 29,952 33,636 Others - - - 6,292 6,581 Ocean shipping - - - 248,675 317,383 Total 257,467 246,714 276,170 377,916 456,420 Average Distance (km) Inland - - - 157 170 Coastal - - - 1,134 1,232 Shanghai 994 1,023 1,011 1,087 1,217 Guangzhou 1,303 1,546 1,813 2,609 2,511 Others - - - 491 350 Ocean shipping - - - 6,795 7,469 Total 736 694 714 873 1,056 Source: Ministry of Communications. - 381 - 5.04 China-s ocean merchant marine has also grown at a phenomenal rate over the past years. China is estimated to have committed over $1.0 billion on ship acquisition between the middle of 1975 and 1979, and an additional $0.3 billion for purchase of second-hand and newly-built vessels by the end of 1980. The total capacity of the Chinese-controlled oceangoing merchant fleet has grown from 1.67 million dwt at the beginning of 1973 to 7.04 million dwt at the end of 1979, or a compound growth rate of over 32% p.a. The growth is continuing unabated with emphasis now being placed not only on tonnage or capacity but also on improvements in technology. 5.05 This rapid growth in water transport, both domestic and overseas, has put a corresponding burden on Chinese ports. In 1979, cargo handled at the 15 larger ports controlled by the MOC reached 212.6 million tons of which only one third was foreign trade cargoes. Port traffic grew at 14.2% p.a. between 1976 and 1979. It is reported that between 1973 and 1979, 40 new deepwater berths capable of handling ships over 10,000 dwt were completed, and that another 50 are presently under construction. Major ports are also being modernized to handle containers as well as large amounts of bulk commodities. Institutions, Organization, and Management 5.06 At the national level, water transport comes, together with roads, under the jurisdiction of the MOC, except for a major segment of the commer- cial shipbuilding capacity which is under the Sixth Ministry of Machine Building. The national level jurisdiction of MOC covers in fact only the 15 larger ports, coastal shipping under two regional bureaus at Shanghai and Guangzhou, inland navigation on the main course of the Chang Jiang and ocean shipping. All other ports and shipping activities, and in particular all other inland waterways, are under the control of provincial or municipal agencies as well as enterprises. 5.07 The organizational structure of the MOC consists of various water transport and highways departments, each of which oversees a hierarchy of external bureaus, divisions, corporations, and enterprises. These usually have a considerable degree of operating autonomy. The ministerial departments are largely engaged in medium- to long-range planning, including the review of the short-term plans submitted by external agencies, the setting of policy (both operating and investment), and the review of operations. 5.08 The major departments involved in water transport operations are: (a) the Water Transport Department dealing with coastal shipping, Chang Jiang Shipping Authority (CSA) and Harbor Bureaus (or ports); and - 382 - (b) the Ocean Shipping Department dealing with the China Ocean Shipping Corporation (COSCO) and Ocean Shipping Agency services. In addition there are various departments concerned with planning, design, and construction of facilities, vessels, and equipment. Among these are: (a) the Planning Department dealing with medium- to long-range planning, review of performance, statistical and data services; (b) the Industry Department dealing with shipyards (except those owned and operated by enterprises) and equipment factories; and (c) the Capital Construction Bureau, which is in charge of engineering design and appraisal, and supervision of construction. Finally, there are several departments responsible for inspection, control, and operational supervision such as: (a) the Salvage Department; and (b) the Port Department serving as Harbor Master and Coast Guard and responsible for environmental control. Dredging 5.09 Because many major Chinese ports are estuarial, annual maintenance dredging needs are large. The rapid development of ports in the last few years has also created needs for much capital dredging. To carry out these programs, China has recently equipped itself with a large and technologically advanced fleet of dredgers. The responsibility for dredging belongs mainly to the MOC, although the Ministry of Water Conservancy has some dredging capabi- lity. The limited information available covers only dredging under the MOC. 5.10 The MOC established, in early 1980, a new state corporation, the China Harbor Engineering Company to design and execute port construction and dredging activities in China and abroad. This company operates a fleet of 500 dredgers and auxiliary vessels, including some of the most modern dredgers in the world. Their dredging design capacity is more than 100 million cu m p.a. and in 1979 they performed 80 million cu m. The staff includes 33,000 technical workers and 3,000 engineers. They are deployed under four construction corporations and four dredging corporations at Tianjin, Shanghai, Guangzhou, and Wuhan, and one design and consultant corporation in Beijing. - 383 - General Problems in Water Transport 5.11 Planning and Coordination. While the water transport system in China is impressive and plays a major role in the sector, there appears to be no effective plan for its systematic operation or development. Coordination of planning among various agencies also appears to be inadequate. 5.12 Coordination among ministries, commissions, provinces, municipali- ties, and even among departments of one ministry needs improvement, as many administrative units appear to be unaware of development taking place in other units which would affect their own operations or effectiveness. The above issue results from the lack of an effective overall maritime (port and shipping) plan. 5.13 The separation of ocean, coastal, and inland water transport into institutionally and administratively separate units results in unnecessary transshipment. For the same reason, consignment size is sometimes less than the technical and economical optimum. Due to jurisdictional (assigned task) requirements, carriers are prevented from offering the most direct service, such as direct coastal port to inland port (or enterprise terminal) or foreign port to coastal or inland port shipping without intermediate transshipment at a major ocean port or coastal port. Potential savings could be achieved through: (a) reduction of port congestion, (b) reduction of port investments; (c) improvement in ship/barge utilization; (d) reduction in transport costs even using present tariff structure; and (e) reduction in ship/barge requirements. 5.14 Tariffs. Although water transport costs are only about 65% of rail costs per ton-km, the price structure gives freight movements by rail a 20-30% advantage. Considering the limitations in rail capacity and the long lead time of large investments needed to expand it, greater emphasis could be given to water transport by (a) increasing its capacity which can be done fairly rapidly, and (b) pricing domestic water transport more in line with its costs. This is particularly true now with escalating fuel costs and potential petroleum shortages. To move the average ton-km, coastal and inland water modes consume only about 30% as much energy as rail transport. It would seem that for instance some of the coal presently moved by rail on north-south routes could shift to parallel coastal shipping routes or the Grand Canal. - 384 - 5.15 Dredging. The dredging capacity mentioned in paras. 5.09 and 5.10 above is deployed on a rigid basis by assigning certain dredgers to given ports with the assigned task of maintaining traditional channels at a certain depth. The optimization of dredger allocations from a technological and economic point of view should be strengthened. Furthermore, surveys and studies of sediment transport as a guide for improving dredging works should be expanded. 5.16 Hydraulic Study Capacity. There are several hydraulic laboratories in China, the most important being the Hydraulic Research Institute of Nanjing, which has several large test basins and tanks. There are smaller laboratories in Tianjin, Dalian, Shanghai and Guangzhou. Staff at the Nanjing Institute, which works largely on the Chang Jiang estuarial and flood control problems, is theoretically competent. The main problem is the lack of effective modern survey instrumentation for field data acquisition and modern laboratory instrumentation and equipment. As a result, both the scope and accuracy of hydraulic research has been quite limited considering the vast coastal, estuarial, and inland water (irrigation, drainage, flood control, etc.) hydraulic problems of China. The development of an effective large-scale hydraulic survey and study capability by the introduction of equipment and instrumentation, supplemented by some training in modern measurement, test and analysis techniques, should receive high priority. B. Ports Traffic 5.17 Ocean ports in China are divided into nationally controlled (MOC) ports and provincial or municipal ports. Only MOC controlled ports are discussed in this report. They number 15, and a summary of their principal characteristics is given in Appendix D. The total amount of cargo handled by these major ports in 1979 was 212.6 million tons, of which Shanghai alone handled 83.5 million tons or nearly 39%. The three principal bulk cargo ports - Dalian, Qinhuangdao and Qingdao - together account for another 73.6 million tons or about 35% of total port throughput. Of the remaining 11 ports, Tianjin, Huangpu, and Zhanjiang account for about 17%, while the remaining 8 minor ports handle only about 9% of the total throughput. 5.18 The growth of port traffic through the 15 MOC ports is summarized in Table 5.2. The rapid growth in port throughput in the 1976-79 period reflects the economic opening of China to foreign trade. An average annual growth of about 14.3% has been sustained during this period. The largest growth is in foreign trade, where imports more than doubled in four years while exports - 385 - increased by 83%. Domestic or coastal traffic also increased significantly during the period, with landings increasing by a factor of 1.37 and loadings by a factor of 1.26 between 1976 and 1979. In 1979 coastal traffic accounted for two thirds of the throughput of the 15 major ports under MOC. Table 5.2: VOLUME OF COMMODITIES HANDLED BY MOC PORTS, 1975-79 (million tons) 1975 1976 1977 1978 1979 W Imports 19.76 18.58 24.81 37.61 42.64 Exports 18.37 15.35 15.83 18.80 28.09 Coastal shipping - in 47.69 48.23 52.04 62.72 66.25 Coastal shipping - out 57.76 59.81 67.01 79.21 75.59 Total Cargo Handled 143.58 141.97 159.69 198.34 212.57 Note: The difference between coastal shipping in and out is due to some traffic originating or terminating at non-MOC ports. Source: Minstry of Communications. Infrastructure 5.19 This growth of traffic has been greatest at the seven major ports of Dalian, Tianjin, Qinhuangdao, Qingdao, Shanghai, Huangpu and Zhanjiang. Recent port improvements have been largely concentrated at these ports but they remain congested. During 1979, for example, ships waited for berths at the ports of Shanghai, Tianjin and Huangpu an average of 30% of their total stop over time or between 2 and 4 days. The major effort to modernize ports started in the early 1970s continues with particular emphasis given now to container terminals in Tianjin, Shanghai and Huangpu (new harbor); and coal terminals at Qinhuangdao, Qingdao and Huangpu. The new coal loading facili- ties at Qinhuangdao are planned to receive ships up to 50,000 dwt while those at Huangpu are designed for ships up to 30,000 dwt. Expansion of facilities is also taking place at smaller ports such as Lianyungang for dry bulk and - 386 - coal. Currently coal is exported mainly through Qinhuangdao and Lianyungang, with respective annual throughput of 10 million and 2.5 million tons of coal. Oil exports go through Dalian, Qinhuangdao, and Qingdao. Dalian and Qinhuangdao are both linked by pipeline to the Daqing field which supplies about half of China's production. Information on the 15 MOC ports is given in Appendix E. Institutions, Organization and Management 5.20 As mentioned above, the 15 major ports are under the control of the MOC. Each port is managed by a Harbor Bureau, with the Shanghai Harbor Bureau assuming special status because of its importance. Its director had Vice Ministerial rank in the past. The Harbor Bureaus have a Director, various Deputy Directors, Department and Division heads. The management of a port operates as an enterprise and is fully responsible for day-to-day operations. The security of each port, as well as specifications for navigational aids, environmental control and standards of ship operation in the approaches to and within the port, is the responsibility of the Harbor Master, who reports to the Department of Harbor Supervisors in the MOC. This department performs a function similar to that of the US Coast Guard, including ship traffic control, with the exception of maneuvering and berth assignment in port, which are under the control of the traffic department of the respective harbor bureaus. Operations 5.21 Ports are operated as autonomous, independent enterprises in the performance of their assigned task under the requirements of their approved operating and investment budget and plan. Each port, depending on its size, has a full range of operating departments including planning, engineering, traffic, training, commercial, general administrative, accounting, etc. In larger ports the subdivisions of departments may be greater. Similarly, larger ports may run their facilities under several different divisions or areas, each of which may have many of the departments existing at the Harbor Bureau level. Each division or area would normally run as a cost and revenue or budget center. Other nondivisional or area specific units such as repair of ships, hospitals, etc. would similarly constitute cost/profit centers. Workers are usually assigned to a department, operational division, or other cost center on a permanent basis. The throughput per berth is generally above the world average of 150,000 tons of general cargo. - 387 - 5.22 Ship traffic is assigned to individual ports. Rail traffic within the port is controlled by the railways in some but not all ports. This is a major disadvantage, as effective port operations and utilization require independent control. With the predominance of general cargo and bulk cargo traffic allocated to a very small number of limited-draft ports, severe congestion exists at the berths onshore, and at the land approaches to the seven major ports. Major Port Problems and Recommendations 5.23 Transshipment. As already mentioned a proportion of cargoes moving through congested ports such as Shanghai and Huangpu is unnecessary tranship- ment cargo arriving by waterborne transport and reloaded at the port onto other waterborne transport. More attention should be given to direct delivery and use of vessels which can be utilized both for coastal (or feeder) and inland water transport. In particular the use of oceangoing water barges should be investigated. 5.24 Liaison with Hinterland. A major proportion of the rapidly growing traffic at the ports of Tianjin, Shanghai and Huangpu is not destined for, or arriving from, the immediate hinterland of these ports; rather, it is going to and coming from places that could be effectively served by rail, coastal or inland water connections from other national or provincial ports. Many of these minor ports have equal or better depth than these three ports, are less congested, and may offer more economical opportunities for expansion. The expansion plans for the major ports, and in particular for the ports of Tianjin, Shanghai and Huangpu, appear to have been developed on the basis of individual port requirements rather than on the basis of a national port and port traffic flow development plan, in which the most economic and effective global port development program is generated by minimizing total transport and investment costs, with due regard to expansion opportunities and the needs of changing technology. 5.25 Port Dredging. Besides the general remarks made about dredging in para. 5.15 above, it appears that, in general, capital and maintenance dredg- ing of ports and their approaches is excessive. This may be greatly improved through the use of formal hydraulic (physical and mathematical) model studies based on updated surveys. Alternate (self-scouring) channel alignments and the use of offshore terminals may similarly offer opportunities for major savings in dredging costs and increased operating depth at terminals. It also appears that some of the lesser ports, as well as some new locations, may offer more economic port development sites than expansion of existing port facilities. Worldwide, the trend has been to move all the estuarial ports to coastal locations to facilitate access of larger ships while at the same time curtailing dredging expenditures. - 388 - 5.26 Operations. In the four ports visited, a large percentage of the time a ship spent at berth was lost due to nonship related factors such as unavailability of equipment, documentation and cargo. These losses of productive berth time are much larger than in many ports of other countries. Together with ship waiting time for berths, it results in vessels spending only 30-48% of their port turnaround time productively. For instance, in 1979 at Huangpu, out of an average time in port of 9.7 days per vessel, 2.9 days were spent waiting for a berth and another 2.1 days waiting unproductively at a berth. For foreign ships the figures were respectively 13.7, 5.2 and 2.8 days. Reduction of lost time at berth would result in substantial benefits. 5.27 Access to all the major ports is depth restricted. The ports of Huangpu, Shanghai, and Tianjin, for example, all have a limiting depth of 8.5 meters at low water; only a few berths have alongside depths of 12 meters, allowing some deeper draft vessels to enter and exit during high water. There are some port sites (Qingdao, downriver Chang Jiang, Ningbo, etc.) which may offer better opportunities than the deepening of channels planned for the major existing ports. Surveys of all existing and potential site approaches and subsequent analysis are essential. 5.28 Planning and development of container technology has so far been limited to the ports with little attention given to transport and storage of containers inland. Container operations can only be technically and economically successful if an integrated, intermodal systems approach is planned and implemented. 5.29 There appears to be little integral scheduling of vessels to coordi- nate their arrival with berth and cargo availability. It is much more effi- cient to slow steam than arrive at full speed and then wait 4 to 6 days. Many ports now practice dynamic queueing, whereby ships are assigned times and facilities as much as one week before their expected arrival time. 5.30 Infrastructure and Equipment. While the general quality of port engineering and construction appears good, there is a lack of: (a) modern engineering approaches; (b) survey information and analysis; (c) effective independent testing, supervision, and control of design and construction (or manufacture); and (d) sufficiently skilled, experienced and specialized professionals. - 389 - 5.31 China has attempted to independently develop much of its technology, particularly in fields such as heavy machinery, materials handling equipment, etc. This has not always been easy nor immediately successful as shown by the two container ship gantries in Shanghai port, which although erected over 14 months ago have not yet been put into service. In general there appears to be a lack of effective understanding of the role and the method for introducing modern integrated physical, operational, and managerial controls. As more modern equipment is introduced, China will require significant training and assistance in integrated system controls, including computer or special purpose data handling devices. 5.32 Telecommunications, Navigational Aids, and Management Information. There is an urgent need to improve inter- and intra-ship and port (domestic and foreign) communications. Many of the delays in port are caused by the lack of timely information, such as manifests, cargo plans, and other docu- ments, including even ship or cargo characteristics. Furthermore, data on traffic, operations and port conditions vary considerably among ports and even among sections of the same port. There is an urgent need for uniform specifi- cation of cargo and other data, as well as for the collection, aggregation, storage, retrieval, and analysis of information to permit improved management and decision making at all levels. 5.33 Tariffs and Costs. Tariffs for various port services such as wharfage, tonnage, storage, etc. are generally lower than comparable charges at Hong Kong or Singapore. However, in addition to such port charges, foreign ships are charged an ad valorem tax of 3%, which makes their port costs substantially higher. Storage charges do not increase with storage time, and there are no penalty charges for any services such as unproductive berth time. While the four ports visited report average surpluses of nearly 50% of gross revenues, it is difficult to ascertain whether existing tariffs fully cover costs. In particular, the depreciation rate is only 3% of the original cost of assets and there is no charge for interest on capital. C. Inland Water Shipping General 5.34 Inland water transport is a widely dispersed industry in China. Of the 107,800 km of waterways in service in 1979 only about 3,000 km on the main course of the Chang Jiang were under direct control of the MOC. More than 320 million tons of cargo were transported on inland waterways in 1979 over an average distance of 170 km (Table 5.1). Only 46 million tons or 14% of that cargo was carried by the Chang Jiang Shipping Authority (CSA) under the MOC. - 390 - The average distance of cargo carried by CSA exceeds 560 km, which means that other inland water transport goods moved only about 100 km on average. The Chang Jiang and its tributaries comprise the most active inland water system with over 230 million tons of cargo moved, or 72% of the total inland water tonnage. Some further details on the CSA are given in Appendix D. The remaining 91 million tons of inland water cargo move on the Zhu Jiang (Pearl River) system, the navigable parts of the Heilongjiang River system, the Grand Canal, and a myriad of smaller waterways. 5.35 Many enterprises and communes rely solely on inland waterways for goods transport and are served by small enterprise- or commune-owned and operated barges and lighters. Most of these enterprises and communes also have their own terminals and terminal equipment. As a result, waterways often have three or four levels or types of terminals - those owned and operated by CSA, by a provincial agency, by a municipal or county agency and finally by an enterprise or a commune. This obviously leads to a large degree of fragmen- tation and often duplication. Although MOC-controlled vessels usually use MOC-owned and controlled terminals, provincial or municipal agency or enter- prise controlled vessels use all types of terminals. Technology 5.36 The role of traditional junks and small manpowered boats or barges is still significant on tributaries of major rivers and the myriad of small waterways, which in general serve the triple purpose of navigation, irriga- tion, and drainage or flood control. On the larger waterways, most tradi- tional junks have now been displaced by modern self-propelled vessels and pushed or towed barges. Specialized barges of up to 5,000 dwt deadweight for general cargo, dry bulk, or liquid bulk are operating on the Chang Jiang and the Zhu Jiang; they are often propelled in barge trains of 2-12 barges, push- towed by a powerful 2,640 SHP towboat. Most barges on the upper Chang Jiang, the Zhu Jiang, and major tributaries are 500-1,000 dwt capacity, while on the lower Chang Jiang they go up to 2,000 and 3,000 dwt. New covered 2,000 dwt (grain) barges were recently acquired from Dravo (USA). These are now under construction in CSA shipyards under a technical assistance agreement with Dravo. About 6,000 SHP push boats are being constructed in the USA for the Chinese authorities. 5.37 A major problem and challenge is the design and operation of upriver and tributary terminals, because of the large variation in water level and the frequent need for levees to protect the surrounding countryside from high water flooding. With seasonal water levels varying up to several tens of meters at some major river ports, many terminals are restricted to the use of floating piers served by floating cranes and the use of rope or cable ways, sliding ramps, and floating ramps for the docking of vessels and vessel-to- shore cargo transfer. This makes terminal operations difficult, slow, and - 391 - expensive. Some fixed docking and loading facilities, particularly for*bulk commodities such as coal, have been installed as far upriver as Wuhan on the Chang Jiang, but these types of terminals are still the exception. Tariffs 5.38 Tariffs for MOC-controlled inland water transport on the Chang Jiang vary with distance. Rates on the upper reaches of the river above Wuhan are higher than those on the lower reaches between Wuhan and Nanjing/Shanghai. Rates are authorized by the State Pricing Bureau and are generally lower than comparable rates charged on tributaries by provincial, county, municipal or enterprise vessels. However, no information was available on how tariffs or rates are determined for service by non-MOC vessels involving waterways under the jurisdiction of several provinces or of provinces and the MOC. Problems and Recommendations 5.39 Institutional. Without more information on non-MOC operations at the provincial and lower levels, it is difficult to determine if the need for additional vessels and facilities indicated by the CSA should be met by new acquisitions or the reallocation of apparently underutilized vessel and terminal capacity controlled by other agencies or enterprises. 5.40 A large percentage of cargo moving through major inland water terminals appears to be transshipment cargo transferred from main vessels (usually MOC-controlled) to vessels controlled by other agencies or enter- prises serving main and/or tributary river routes. 5.41 While it is recognized that many enterprises require their own terminal for effective operations, population centers such as cities and towns would be better served by a limited number of larger terminals which would provide for effective storage and distribution rather than by the current proliferation of small inadequate terminals. The average terminal handling rate for break bulk cargo, for example, and the resulting vessel turnaround time are now poor. 5.42 Channels. The main river navigational channels are well maintained and marked. This is not the case for tributary rivers, largely because provincial, municipal, or other authorities do not usually have sufficient funds to develop and maintain the navigational channels. 5.43 Tariffs. The differential tariff on main and tributary river routes results in different levels of service. Also linear tariffs without volume discounts encourage movements of large numbers of small lot sizes over comparatively short distances. As mentioned above, cross-subsidies are apparent between the upper and lower reaches of the Chang Jiang; these interregional subsidies appear similar to the railway subsidies (para. 3.41). - 392 - D. Coastal Shipping General 5.44 Coastal shipping is an important segment of the Chinese transport industry. It handled nearly 69 million tons of cargo in 1979, of which 50 million tons were carried by vessels of the two MOC-operated coastal shipping transport bureaus, and 19 million tons by vessels (including junks) operated by various provincial enterprises (Table 5.1). The 1979 traffic handled by vessels under MOC was the same as in 1978. The average distance of carriage is around 1,200 km. Coal comprises more than 31% and crude oil 38% of the total cargo carried by coastal shipping under the MOC. The remainder consists largely of mineral ore, petroleum products, cement, fertilizer, and grain. Little general cargo is transported by coastal shipping. Institutions 5.45 The MOC controls the two coastal shipping operating companies: the Shanghai and the Guangzhou Water Transport Bureaus. At the MOC level, the divisions of the Water Transport Department are responsible for planning, budgeting, and overall control of the coastal transportation companies. Detailed scheduling, vessel assignment, cargo booking, vessel husbandry, manning supply, and other vessel operating management functions are performed by the individual coastal shipping transport companies. Traffic 5.46 Information on coastal traffic is scant. Transport figures for traffic not under the two bureaus of Shanghai and Guangzhou are available for 1978 and 1979 only. Ton-km for the two bureaus are given below for the 1975-79 period. 1975 1976 1977 1978 1979 -----------(million ton-km)------------- Shanghai 30,232 30,500 32,017 35,292 34,264 Guangzhou 21,176 20,759 22,944 37,549 35,477 While the Shanghai Bureau's traffic has increased by 13% between 1975 and 1979, that of the Guangzhou Bureau grew by nearly 70%. This is probably due in part to the resumption of shipping through the Taiwan straits, which was previously almost nonexistent. This is corroborated by the fact that the average distance of shipping by the Guangzhou Water Transport Bureau has almost doubled since 1976 and is now over twice that of the Shanghai Bureau. There is also a significant amount of passenger traffic: about 4 million passengers were carried on coastal routes in 1979. - 393 - Problems 5.47 The information available on coastal shipping is too scant to permit identifying any specific issue in this subsector, except for the general one of administrative compartmentalization affecting transshipments mentioned above (para. 5.13). E. Ocean Shipping Fleet 5.48 Data on the size and age distribution of Chinese ships could only be obtained in general terms. The average age of oceangoing ships (1,000 GRT or larger) is now 13.8 years, which is appreciably higher than the average age of ships worldwide. Tankers in the Chinese merchant fleet vary in size, with many in the 40,000 to 90,000 dwt class, but with a small proportion of 10,000 to 30,000 dwt. Most dry bulk carriers are 20-30,000 dwt, though there are a few 70,000 dwt and 100,000 dwt bulk carriers as well. General cargo ships are generally small and under 20,000 dwt, with some in the 4,000 dwt class. 5.49 Since 1978/79 China has started to order new ship construction and continued buying secondhand vessels, while at the same time disposing of some of the older or unsuitable used vessels in its fleet. Among the new orders is a fleet of 10 RoRo vessels of 6,850 dwt ordered from Kawasaki Shipbuilding in Japan for $100 million and a larger number of semi-containerships. It is interesting to observe that while the Government is making major commitments to container terminal construction at the country's three major ports, COSCO has no orders for large mainline containerships outstanding. It has a number of small semi-container vessels with capacities of 200-300 TEU, two of which are now employed on the first direct COSCO container service between Shanghai and Australia. The RoRo vessels will probably be employed in trade with Korea, Japan, Hong Kong, and the Philippines. Routes and Services 5.50 China has developed extensive liner services between major Chinese ports and Northern and Southern Europe, the Mediterranean countries, South Asia, North America, Japan, South East Asia, and Australia. It has not joined any conferences or pooling agreements nor does it conform to cargo sharing agreements, with the exception of some instances when a formal bilateral maritime agreement has been negotiated. There is a 3% ad valorem tax on foreign operators (para. 5.33) serving China, which has some effect on non-Chinese liner services to Chinese ports, as has the fact that all charges incurred by a ship must be paid on demand and usually when incurred. Institutions 5.51 The China Ocean Shipping Corporation (COSCO) reported that as of November 1980, it operates about 450 oceangoing vessels, with a combined - 394 - capacity of over 7 million dwt. It is the main agency handling foreign trade, though some companies of provincial transport bureaus (Guangdong, Fujian, etc.) have recently acquired oceangoing vessels themselves or in joint ventures with COSCO companies. (COSCO has five component shipping companies.) 5.52 The Ministry of Foreign Trade controls all of China's foreign trade through the State Trading Corporations. The transportation requirements of foreign trade are organized by the China National Foreign Trade Transport Corporation, which in turn assigns all ocean transport requirements to the China National Chartering Corporation and COSCO. Recently, provincial governments have been allowed to establish their own provincial trading corporations, which in turn may assign cargoes to different shipping alternatives or to a Provincial Ocean Shipping Corporation. 5.53 The planning, budgeting, and pricing of ocean shipping are control- led at the highest level by the State Planning and Economic Commissions and the State Pricing Bureau. Other government agencies deeply involved in the financing of foreign trade, shipping investment, charter parties, and various contractual and financial activities in ocean shipping are the Bank of China, the General Administration of Exchange Control, the Control of Foreign Investment Committee, and the China International Trust Investment Corpora- tion. Husbanding of all foreign ships calling at Chinese ports is performed by the China Ocean Shipping Agency (Penavico or COSA). COSA is the owners' (operators') representative in China and provides for all services, supplies, port facility requirements, and general representation of foreign ships calling at China-s ports. It even provides Chinese crewing for vessels not trading with China. Problems 5.54 Training. There is an increasing shortage of skilled seafarers. This is a fact noted by COSCO. Yet at the same time COSA offers to provide Chinese crews for foreign operators. There are at present two (university- level) maritime academies at Shanghai and Dalien to train officers for oceangoing ships. In addition, COSCO has set up four intermediate training schools which offer 2-3 month courses followed by on-board training. In total about 1,500 officers and crew are graduated every year. In total, China is estimated to have 20,000-30,000 trained seafarers for oceangoing vessels. It appears that providing crews may become a major obstacle to the continued growth of the Chinese Merchant Marine, as 1,500 graduates a year can barely make up for normal manpower losses. 5.55 Fleet Utilization. The main concern of China's overseas shipping has been to capture and control a substantial proportion of its foreign trade. China stayed out of conferences and other shipping associations and as a result the utilization of its growing fleet is decreasing constantly, as it is cut out from participating in cross trade. Since China's trade is unbalanced for most destinations, there is much empty sailing after delivering exports or in going to load imports. - 395 - Appendix A Page 1 THE TRANSPORT SECTOR The China Railway Society (CRAS) 1. The CRAS is a nongovernmental academic body composed of relevant scientific and technical personnel in various railway professional fields. It was founded in April 1978. 2. Objectives (a) Organize academic exchanges involving various railway professional fields (both at home and abroad). (b) Organize activities on popularizing railway scientific and technological knowledge so as to raise the scientific and technical standard of railway personnel. (c) Organize scientific and technical personnel to discuss important railway scientific and technical problems; submit to the government rational proposals and consultative advice, to be used as a reference in policymaking. (d) Compile and publish railway technical periodicals. 3. Membership. All scientific and technical personnel can apply for membership in the Society if they have worked for more than three years after graduating from colleges or institutes and have been in the posts of engineer, technician, lecturer, assistant research fellow or above those ranks, or have acquired equivalent qualifications. By the end of 1979, the total number of members of the Society was 9,461. 4. Organization (a) The highest leading organ of the CRAS is the National General Assembly which meets once in every four years. Delegates to the General Assembly are nominated by democratic election. The General Assembly elects the Board of Directors, which in turn elects the President, Vice Presidents, Secretary General and several Permanent Directors to form the Permanent Board. Under the Board is the Secretariat, which transacts the routine work under the leadership of the Secretary General and his Deputy. The First General Assembly was held in 1979, and elected the 159 members of the Board of Directors (2 reserved for Taiwan). (b) By the end of 1979, Regional Railway Societies (or a Preparatory Group of Regional Railway Societies) were established in 24 provinces, municipalities and autonomous regions. - 396 - Appendix A Page 2 (c) Under the CRAS the following Committees have been established according to professional fields: Railway Motive Power Committee Railway Car Committee Railway Automation Committee Railway Electrification Committee Railway Transportation and Economic Committee Railway Engineering Committee Railway Material and Technology Committee Railway Standardization and Metrology Committee (d) An Editing Committee and a Popularizing Committee are affiliated to the CRAS. 5. Publications (a) "Railway Journal" (b) "Railway Knowledge," popularized scientific reading material (c) Papers and proceedings of symposiums and meetings 6. Financial Sources (a) Subsidies from the state (b) Revenue of various undertakings run by the Society (c) Subscription (Method of subscription is not yet set. No individual subscription is collected at present) (d) Donations from individuals or departments - 397 - Appendix B Page 1 THE TRANSPORT SECTOR Chinese Academy of Railway Sciences 1. The Chinese Academy of Railway Sciences, founded on March 1, 1950, is a polytechnic scientific and technical research center of the railways in China. 2. At present, the Academy consists of 15 institutes in charge of 91 research divisions. The total number of staff is 6,823 (including 2,561 research technicians). 3. Research subjects stem mainly from major technical problems in railway transportation, equipment production and capital construction, with due consideration for long-term problems involving theoretical studies as well as those related to railway technical/economic policies. 4. In recent years, the major target has been and continues to be the electrification of tractive forces, focused on electric locomotives. Diesel locomotives will also be developed on a moderate scale, while steam locomo- tives still have to be renovated. Efforts are also directed to a number of urgent and crucial technical problems. 5. The Academy is basically complete, with departments covering all aspects of railway science and techniques, including laboratories and test facilities. It is equipped with a variety of experimental facilities, including 15 test cars and a 9 km test loop located in the eastern suburbs of Beijing where locomotives and rolling stock as well as the track structure can undergo operational tests and stress determinations. There is a library furnished with more than 220,000 books and over 1,800 kinds of periodicals. 6. Orientation and Assignments of the Institutes (a) Railway Transportation Research Institute. Founded in 1959 - 5 research divisions - 123 staff members in total. Responsible for: research of railway technical/economic policies; theoretical problems of railway transportation and economy; organization of railway operations; overall planning and designing of stations and junctions; technical requirements and facilities of both passenger and freight transport; economics - 398 - Appendix B Page 2 of railway transportation, industrial production and construction, train operation and enterprise management; systematic application of computers in operational and managerial fields. (b) Railway Construction Research Institute. Founded in 1952 - 11 research divisions - 321 staff members in total. Responsible for: research with respect to construction of new railway lines; technical renovation of existing lines; and developing of new structures, new techniques and theories concerning railway construction and renovation as well as defense engineering. (c) Locomotive and Rolling Stock Research Institute. Founded in 1958 - 9 research divisions - 289 staff members in total. Responsible for: research with respect to theoretical problems involved in locomotives and rolling stock matters; major technical problems which envisage long term, guiding polytechnique nature; and also research work on technical parameters of new or prototype products and the testing evaluation of principal component parts. (d) Communications and Signalling Research Institute. Founded in 1956 - 8 research divisions - 214 staff members in total. Responsible for: research of automatic signalling sytem and installations; theoretical problems involved; special communication systems for different functions; data transfer; automation systems of wire, radio or microwave communications, traffic control, train classification and train operation. Application of electronics, electromagnetic and computer techniques and other related new techniques in railway communication and signalling fields, aiming at raising efficiency of transport, ensuring traffic safety, improving labor conditions and raising level of automation and modernization. (e) Metals and Chemistry Research Institute: Founded in 1956 - 8 research divisions and one chemical analysis laboratory - 217 staff members in total. Responsible for: research and develop- ment of new materials, new technologies and techniques and new devices including systematic research of railway steel series, heat treatment techniques, welding technologies, nondestructive testing, anti-corrosion techniques, fracture mechanics, contact damages, corrosion and lubrication; research on transistor-based electronic parts and functional materials; application of high polymer materials and synthetic materials on railways; physical and chemical techniques for evaluation and test of materials. (f) Computer Technique Research Institute. Founded in 1979 - 5 research divisions - 110 staff members in total. Responsible for: research work on mathematical processers in the application - 399 - Appendix B Page 3 of computer technique, computer network and system structures, special computing equipments, computer program operation system and arithmetic languages in the field of railway management and industrial automation. (g) Mechanization Research Institute (in Beijing): Founded in 1979 - 2 research divisions - 64 staff members in total. Responsible for: mechanized operation of cargo handling, track maintenance and construction. (h) Scientific and Technical Information and Research Institute, Ministry of Railways. Founded in 1958 - 8 information and documentation divisions and one publishing division - 173 staff members in total. This institute is the information center of the railway system in our country. Responsible for: compiling information for use in railway technical policymaking, planning of scientific and technical research programs and exploitation of railway potentials by way of technical innovation and reformation on the basis of collection of information and documentation available at home or abroad; editing and publishing periodicals; service of books and documentation, duplication and retrieval. (i) Standards and Metrology Research Institute, Ministry of Railways. Founded in 1965 - 5 research divisions - 144 staff members in total. Responsible for: research work on theories and methods of standardization of railway products; research and formulation of polytechniques and new measuring and weighing apparatus. It is also responsible for consignments by the National Truck Weighing Station, and transfer and check of weights and measures. (j) Southwest Research Institute (in Emei, Sichuan Province): Founded in 1961 - 6 research divisions and one information division - 343 staff members in total. Responsible for: research work on theoretical problems in design and computation and technical problems concerning tunnelling engineering in mountainous areas; technical problems in relation to geology in tunnelling and construction of tract engineering and tall piers in mountainous areas; hydraulic and hydrological problems. (k) Northwest Research Institute (in Lanzhou, Gansu Province): Founded in 1962 - 3 research divisions - 348 staff members in total. This institute is engaged mainly in research work on railway roadbed and engineering geology. It is commissioned with research work on roadbed construction under poor geological conditions such as loess, desert, permafrost (including Salt Lake), collapses and landslides, and the related surveying, exploring and measuring techniques. - 400 - Appendix B Page 4 (1) Sipang Rolling Stock Research Institute, Ministry of Railways (in Qingdao, Shandong Province): Founded in 1959 - 4 research divisions and one information division - 443 staff members in total. Responsible for: research, design and trial manufacture of new models of passenger coaches and freight cars including components and parts; research of new rolling stock techniques; tackling major technical problems in operation. (m) Dalian Diesel Locomotive Research Institute, Ministry of Railways (in Dalian, Liaoning Province): Founded in 1950 and reformed in 1955 - 6 research divisions, one standardization division and one information division - 431 staff members in total. Responsible for: research, design and trial manufacture of diesel locomotives and major components and parts such as turbochargers, hydraulic transmission packs, car bodies and bogies, etc. (n) Qishuyan Locomotive and Rolling Stock Technology Research Institute, Ministry of Railways (in Changzhou, Jiangsu Province): Founded in 1959 - 6 research divisions, one information division and one standardization division - 499 staff members in total. It is engaged mainly in research of new technologies, new techniques, new materials and new installations for manufacture and repairs of locomotives and rolling stock. (o) Zhuzhou Electric Locomotive Research Institute, Ministry of Railways (in Zhuzhou, Hunan Province): Founded in 1959 - 6 research divisions, one information division and one standardiz- ation division - 404 staff members in total. Responsible for; research and design of new electric locomotives; technical renovations of existing ones; high-power thyristors; A.C. electric system for motor train-sets; as well as electric motors and apparatus. 401 - Appendix C THE TRANSPORT SECTOR Proposed Highway Sector Studies Resources Required Issue Priority Timing Local Foreign Highway manpower requirements 1 1981/82 Sr. engineer with substantial Highways manpower and training plan experience in managerial capaci- specialist for 6 months ties in roads department operations (2 visits) and with relevant education for 18 months. Would require substantial travel within China to aassess needs at different levels in different provinces. Demand forecasting, including 1 1981 and Transport economist or marketing Transport ec9nomist that for competing modes specialist full-time for 1 year - for 6 months half-time thereafter. (2 visits) Costs & services charac- 1 1981/82 Transport economist, full time, Transport economist/ teristics of road transport with half-time engineer and truck- engineer/or road cost (input to multimodal com- ing cost specialist - all for specialist for 3 months/a parative study) 6 months. (2 visits) Road transport pricing, user 1 1981 Transport economist and 1 fiscal Transport economist charges and financing specialist full-time for 6 months for 2 months/a mechanisms plus trucking cost specialist for (1 visit) 3 months. Optimum truck size and weights 2 1982 Transport economist or engineer Engineer-economist full-time with part-time assistance for 6 months from truck fleet specialist, pave- (2 visits) ment research engineer and motor vehicle manufacturing specialist for one year. Road construction materials: 1 1981/82 Materials engineer full-time for Visit by Chinese review of state of the art 1 year, with chemical engineer, specialist to Europe and evaluation of alternative preferably with experience in coal solutions processing and petroleum refining, for six months. Initial study would delineate any further research required. Cost interrelationships among 2 1982 Initial study (lasting 6 months) by Possibly visit by road qonstruction, mainte- Phase I transport economist, pavement Chinese specialists nance and vehicle operating research scientist, and systems to India, USA and costs analyst would focus on (i) detailed Brazil review of Kenya, Brazil,and India and similar research elsewhere to adapt for utilization in China; and - (ii) definition of further research required for Chinese conditions. /a Transport economists and trucking cost specialAsts for Studies 3 and 4 would preferably be the same individuals. - 402 - Appendix D Page 1 THE TRANSPORT SECTOR Chang Jiang Shipping Authority (CSA) 1. General. The Chang Jiang passes through nine provinces plus the municipality of Shanghai and has a total length of 6,300 km. The river basin covers an area of over 1.8 million sq km containing a population of over 300 million and an agricultural area of 400 million mu. The navigable length of the Chang Jiang itself is about 3,000 km, and there are about 15,000 km of navigable tributaries. The CSA controls shipping on the main course of the Chang Jiang while the tributaries are generally under the control of the governments in the provinces through which they run. The CSA provides most transport on the main river and was, until recently, precluded from extending its services to coastal shipping, though it could participate in direct services between the main river and its tributaries. As main river tariffs are substantially lower than most tributary tariffs, few tributary operators (provincial, county or municipal enterprises) provided services on the main river, though some did provide intertributary/main river service. CSA freight traffic has grown from only 300,000 tons/year in 1949 to over 46 million tons/year in 1980. 2. River Hydraulics and River Domain. The Chang Jiang is divided into seven sections. The main channel is mostly in natural condition. Upriver sand and silt is dredged and rock occasionally blasted to maintain required depths. The condition of the seven sections is as follows: Length Section dwt/a (km) 1. Shanghai-Nanjing 20,000 337 2. Nanjing-Anqing 5,000 302 3. Anqing-Wuhan 5,000 404 4. Wuhan-Chenglingji 3,000 232 5. Chenglingji-Yichang 3,000 394 6. Yichang-Chongqing 1,500 660 7. Chongqing-Yibin 1,500 384 /a This is the capacity of vessel (self- propelled) that can be used during medium and high water, i.e. for about seven months/ year. - 403 - Appendix D Page 2 The CSA, through its Navigation Channel Bureau is responsible for navi- gational aids, which are mainly automatically controlled (dry battery or solar cell powered). 3. Organization, Administration, and Fleet. The administration of CSA consists of three levels: (a) CSA Headquarters Administration; (b) Shipping Administration Bureau and Branch Offices; and (c) Small Ports. The CSA has five branch offices in Chongqing, Wuhan, Wuhu Nanjing, and Shanghai and three shipyards. At headquarters, the planning division performs an investigation of cargo shipping demands in the form of feasibility, origin/destination, and transport flow studies. The relationships between capacity and costs of transportation by water, rail, and road are developed, and consideration is given to integrated multimodal transportation. 4. Guidelines for annual planning are given by the State Planning Commission in November. Thereafter all large enterprises draw up an annual production plan, as well as a transport requirement plan, prepared in collaboration with transport operators such as the railways and the CSA. Current CSA transport capacity for mixed cargo and coal iLs inadequate. In recent years the Planning Commission has encouraged competition among agencies, although every one must charge the same rate and compete only on service. In principle, three-year plans are developed and reviewed in annual Ministry of Communications "Cargo Resource" Investigative Meetings. An annual task (or assignment) meeting is held each year in August/September with the State Planning Commission and the Ministry of Communications, at which the next year's assignments or tasks are determined and agreed upon. Neither the short-term nor long-term plans were available. 5. Most shipping services are supplied by the CSA on a contract basis, usually on a year-by-year basis. Terms and conditions are decided by inter- ministerial agreement and approved by the State Economic Commission and the State Pricing Bureau. For example, large freight contracts may be negotiated among the Ministries of Metallurgy, Communications, and Railways. The total planned assignment for CSA is determined by the Ministry of Communications. Prices are based on eight classes of cargo, with differential up and down river tariffs. There is a minimum charge for a 50 km distance. Tariff changes must be approved by the State Pricing Bureau.. The 12 largest cargoes are coal, oil, iron ore, steel and iron, timber, grain, chemical fertilizer, cement, construction material, salt, nonferrous ores and general cargo. Demurrage on cargoes is usually paid by the user (cargo owner) enterprise at terms agreed upon (3 days' free time). Cargo contracts do not allow volume discounts. - 404 - Appendix D Page 3 6. Port Facilities. The CSA owns and operates 25 ports on the main river plus terminals at Shanghai. With the exception of some of the main terminals at Wuhan, Nanjing, and Shanghai, most terminals consist of floating docks served by floating cranes. In many cases cable cars with wheels are used to move cargo from the floating dock up a ramp on the adjacent embankment. The two biggest CSA ports are Nanjing and Wuhan, both of which have bulk cargo facilities with fixed berths, including coal conveyors, and ship loaders, as well as floating crane transfer from fixed berths. The total amount of cargo handled by CSA port or terminal facilities was about 92 million tons in 1980, while 86 million tons were handled by ports under the jurisdication of the CSA in 1979. 7. The average turnaround time in port for a vessel at one of the major CSA ports was 5-7 days, largely because of the limited storage area. The average number of working days lost due to rain was 35 days/year for major bulk cargoes (coal, ore, grain, etc.) and 65 days/year for general cargo. Seventy-eight percent of the cargo transferred at CSA ports and terminals is from or to CSA's own vessels. While CSA ships may use other terminals, this is usually difficult for operational reasons and is usually only done at tributary ports. 8. Existing Fleet and Shipbuilding. The fleet is composed of about 2,000 vessels with a capacity of approximately 1.7 million dwt. It includes 200 push or pull tugboats, 130 passenger or combination passenger and cargo vessels, 40 freighters, and about 1,600 barges of all types. Many more vessels are owned by provincial, county, or municipal enterprises, some of which are based on the Chang Jiang or provide transport on the Chang Jiang. The CSA has its own shipbuilding and repair facilities and operates major shipyards at Chongqing, Wuhan, Nanjing, Wuhu, and Shanghai. These yards build most of the vessels for CSA including ship equipment. Practically all ship repairs are performed by CSA yards. Similarly, yards and workshops build most port equipment (cranes, conveyors, forklifts, etc.). The only vessels contracted out are large 5,000 dwt oil tankers. 9. Licensing Regulations. Licenses for operation on the Chang Jiang are issued by the Harbor Superintendency Bureau of the Ministry of Communi- cations. All ships must be inspected before licensing and must annually maintain their licenses in force. Vessels operating on tributaries are usually licensed by local authorities. 10. Communications. The CSA has its own telephone network and VHF station at each dispatch office. - 405 - Appendix E THE TRANSPORT SECTOR Summary of Ma5or Chinese Port Data, 1979 Total no. of Total Equipment Total berths with rail Storage Storage Storage sets total Throughput berth Total capacity length area area area mechanized in million length no. of exceeding in port total covered open equipment) tons/year (m) berths 10,000 dwt (km) -------------- (000 sq m) ------------ Total /a 212.57 43,892 313 133 422.0 5,355 1,362 3,993 7,075 Dalian 31.48 9,346 63 23 127.7 1,140 277 863 521 Yingkou 0.25 528 8 - - 96 10 86 41 Tianjin 12.70 4,423 27 12 20.6 379 90 289 636 Yantai 4.60 1,625 15 3 4.5 94 30 64 199 Qinhuangdao 24.08 2,070 11 9 63.2 740 54 686 263 Qingdao 18.02 4,595 24 9 5.9 219 40 179 439 Lianyungang 6.81 1,308 9 5 5.4 155 13 142 404 Shanghai 83.50 12,762 95 50 11.8 1,763 613 1,150 3,266 Shantou 1.75 350 3 - - 53 28 25 132 Huangpu (Guangzhou) 12.11 2,470 14 12 35.1 310 103 207 420 Zhanjiang 10.62 2,007 14 8 47.0 265 70 195 369 Haikou 0.83 741 10 - - 29 11 18 69 Basuo (Dongfang) 3.05 628 4 2 0.9 43 5 38 49 Sanya (Yaxian) 0.41 205 3 - 26 7 19 51 Ningbo 2.36 834 13 C - 43 11 32 216 /a For the 15 ports that come under the MOC. Source: Planning Department, Ministry of Communications. ci 0 0 0 0 cdz cD Contents 1. TRENDS AND PATTERN OF FOREIGN TRADE . . . . . . . . . . . . . . 411 Size of External Trade . . . . . . . . . . . . . . . . . . . ll Trends in External Trade . . . . . . . . . . . . . . . . . . 413 Commodity Structure of Trade . . . . . . . . . . . . . . . . 417 The Direction of Trade . . . . . . . . . . . . . . . . . . . 426 2. THE INSTITUTIONAL SETTING . . . . . . . . . . . . . . . . . . 428 The Basic Organizational Framework . . . . . . . . . . . . . 428 Decentralization of Foreign Trade Management . . . . . . . . 430 3. NEW MEASURES FOR PROMOTING FOREIGN TRADE AND INVESTMENT . . . . 433 Export Processing . . . . . . . . . . . . . . . . . . . . . . 433 Compensation Trade . . . . . . . . . . . . . . . . . . . . . 434 Cooperative Production . . . . . . . . . . . . . . . . . . . 435 Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . 436 Joint Operations . . . . . . . . . . . . . . . . . . . . . . 439 Preferential Treatment in the Special Economic Zones . . . . 439 Problems in Direct Foreign Investment . . . . . . . . . . . . 440 Summary Appraisal . . . . . . . . . . . . . . . . . . . . . . 441 4. PLANNING AND PRICING IN FOREIGN TRADE AND EXCANGE . . . . . . 442 Foreign Trade and Foreign Exchange Plans . . . . . . . . . . 442 Pricing in Foreign Trade and Exchange . . . . . . . . . . . . 445 Profits/Losses in Foreign Trade and Exchange Conversion Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . 449 Planning for External Borrowing . . . . . . . . . . . . . . . 450 5. BALANCE OF PAYMENTS, EXPORT PROSPECTS AND EXTERNAL BORROWING . 451 Recent Balance of Payments Developments . . . . . . . . . . . 451 Export Prospects . . . . . . . . . . . . . . . . . . . . . . 454 External Borrowing . . . . . . . . . . . . . . . . . . . . . 461 - 409 - - 410 - TABLES IN TEXT 1.1 Merchandise Exports and Imports as a Percentage of GNP - an International Comparison, Average for 1977 and 1978 . . 412 1.2 Average Annual Growth Rates of the Value (in Current Dollars) of Exports and Imports, 1953-80 . . . . . . . . . . 413 1.3 Exports to and Imports from Centrally Planned and Market Economies, 1950-80 . . . . . . . . . . . . . . . . . . . . . 415 1.4 Imports by Broad Commodity Categories, 1950-79 . . . . . . . . 418 1.5 Major Imports, by Volume and Value, 1976-80 . 9 7 . . . . . . 421 1.6 Merchandise Imports by Commodity Group, 1976-79 . . . . . . . 422 1.7 Merchandise Exports (SITC Categorization), 1976-79 . . . . . . 424 1.8 Major Exports, by Volume and Value, 1976-80 . . . . . . . . . 425 1.9 Direction of Trade, 1977-80 . . . . . . . . . . . . . . . . . 427 5.1 Unofficial Balance of Payments Estimates, Current Account, 1977-80 . . . . . . . . . . . . . . . . . . . . . . . . . . 452 5.2 Unofficial Balance of Payments Estimates, Capital Account, 1977-80 . . . . . . . . . . . . . . . . . . . . . . . . . . 455 5.3 Agreements on Official or Officially Supported Medium- and Long-Term External Loans . . . . . . . . . . . . . . . . 462 APPENDICES A. Foreign Trade Corporations under the Ministry of Foreign Trade 465 B. Corporations not under the Ministry of Foreign Trade that can Engage in Exporting and Importing . . . . . . . . . . . 466 1. TRENDS AND PATTERN OF FOREIGN TRADE Size of External Trade 1.01 Because of the country's diversified resource endowments, its huge size in terms of both area and population, and its large domestic commerce, China's foreign trade has been small in relation to the whole economy. For at least two decades after the establishment of the People's Republic, various international events and domestic developments hampered the expansion of external trade. The embargo by Western countries since the start of the Korean War and the lack of diplomatic recognition by a number of countries restricted China's trade with nonsocialist countries for a long time. Trade with the USSR and East European countries has been conducted on a bilateral, balanced basis, except for loans (mainly Soviet) received and repaid by the mid-1960s. The experience with the Soviet aid led China to pursue even more resolutely a policy of self-reliance. 1.02 Moreover, under the centrally planned economic system, the domestic market has been insulated from the world market. Import-substitution has progressed without interruption from consumer goods to capital goods, and further to intermediate goods. Furthermore, after full repayment of the Soviet debt in 1965, imports and exports were maintained more or less in balance. Whenever a trade deficit occurred for a few consecutive years, imports and exports would be planned to restore the trade balance or create a surplus. 1.03 Since the early 1970s China has concentrated on the task of modern- ization. Its attitude towards external trade and capital has become more positive. Recognizing the importance of the foreign exchange constraint, the Government has accorded exports high priority, and foreign investment and finance have been allowed. Even with these changes, and the consequent more rapid growth of trade, China's exports in 1977 and 1978 were on the average still only 4.5% of GDP. In an international comparison (Table 1.1), China shares the lowest position with Turkey; its average is considerably lower than those of comparable large countries and much below the average of 11% for all low-income developing countries. In Turkey as well as in India, however, the import ratio to GNP is substantially higher than that in China (4.7%) as a result of substantial capital inflows. The low level and non- competitive nature of trade in China-s economy have apparently contributed considerably to the bottlenecks and low efficiency in production. This si- tuation can be greatly improved if China's foreign trade under the present policy expands over a long period more rapidly than the GDP growth rate. In fact, the much higher growth rate of foreign trade than GDP in 1979 and 1980 has already increased the exports/GDP ratio to 6.4% and the imports/GDP ratio to 6.9%. - 411 - - 412 - Table 1.1: MERCHANDISE EXPORTS AND IMPORTS AS A PERCENTAGE OF GNP - AN INTERNATIONAL COMPARISON, AVERAGE FOR 1977 AND 1978 Country Exports/GNP Imports/GNP China /a /b 4.5 4.7 India 6.1 6.9 Indonesia 26.2 15.1 Bangladesh 7.1 17.0 Turkey 4.0 10.3 Brazil 7.3 8.2 Mexico 6.0 8.0 Japan 11.2 10.0 USA 6.5 8.5 USSR 5.6 5.2 All developed countries (1978) 15.5 16.0 Low-income developing countries (1978) 11.1 12.4 Middle-income developing countries (1978) 16.5 21.2 /a For China, GDP figures were used; the GDP figures were adjusted by the mission on the basis of national data to make them comparable with data from other countries. See Annex A. /b For 1979 and 1980, the percentages are estimated as follows: Exports/GDP Imports/GDP 1979 5.4 6.2 1980 6.4 6.9 Sources: For China, State Statistical Bureau (SSB) and Ministry of Foreign Trade; for other countries, World Bank, World Development Report, 1980. 1.04 China's trade accounts for less than 1% of world trade. Except in the trade of some nonferrous metals (such as tungsten, antimony and tin) and medicinal herbs, of which China is an important supplier on the world market, China's influence on the world market is very small. Exports of tungsten, antimony and tin amounted to $221 million in 1979 and accounted for 1.6% of China's total exports. Exports of medicinal herbs, consumed mostly by overseas Chinese, are very small. - 413 - Trends in External Trade 1.05 There are neither quantum indexes nor appropriate deflators to determine the trends in China's imports and exports in real terms, but an indication may be gained by using the rates of change in the international price index. Since the economy had largely recovered from the many years of warfare in the 1940s by 1953, it may be taken as a base year. During 1953-80, the value of China's exports increased from $1 billion to $18 bil- lion, or at an annual average growth rate of about 11%. The corresponding average rate of growth for imports was 10%. Allowing for increases in international prices, the annual growth rate of China's trade in real terms can be roughly estimated at 5.3% for exports and 4.5% for imports (Table 1.2). Table 1.2: AVERAGE ANNUAL GROWTH RATES OF THE VALUE (IN CURRENT DOLLARS) OF EXPORTS AND IMPORTS, 1953-80 (%) World Exports Imports inflation /a 1953-80 11.2 10.4 5.9 /b 1953-70 4.8 3.3 1.4 7c 1970-80 23.1 23.5 14.0 1977 10.7 9.7 8.6 1978 28.4 51.0 18.3 1979 40.2 44.1 14.5 1980 32.7 23.5 12.5 /a Based on the "International Price Index" compiled by the World Bank's Economic Analysis and Projections Department, November 12, 1980. /b 1955-80. 7c 1955-70. Sources: Ministry of Foreign Trade and SSB. 1.06 During the 1970s, however, both exports and imports increased much more rapidly. The value of both exports and imports in current dollars increased at slightly over 23% a year on average. Allowing 14% for world inflation, the annual average growth of the real value of exports and imports can be estimated at about 9%, substantially higher than the average real GDP growth rate of about 6%, in sharp contrast with the rates for 1953-70 (Tables 3.8 and 6.10 in the Main Report). - 414 - 1.07 The growth trend of China's foreign trade has by no means been smooth. Changing international relations, together with domestic political movements interwoven with shifts in development strategies and economic fortunes, have greatly affected foreign trade. In 1952 the "Five Anti Move- ment" against national capitalists disrupted industrial and trade activities. Foreign trade recovered quickly the following year and grew fairly rapidly during the First Five-Year Plan period (1953-57), mainly due to the close economic cooperation with the USSR and Eastern European countries as China's trade with the West fell dramatically. Soviet aid was a major factor in trade development: "from 1950 to 1959, the Soviets delivered $1.35 billion worth of equipment and completed about 130 projects, including factories for trucks, machine tools and generating equipment."/1 (Of these loans, $430 million was specifically for economic development.) This was reflected in the large amount of imports from, as well as the trade deficit with, the USSR from 1951 to 1955. Trade with centrally planned economies reached 70% of China's total trade in 1953 and two thirds in 1957 (Table 1.3). 1.08 However, the economic crisis of 1960-62, together with the deterioration of relations with the USSR and the Eastern European countries, resulted in a rapid decline in foreign trade. Trade with the USSR was vir- tually stopped. The total trade value registered its second decline in 1962. As the development strategy shifted to readjustment and more balanced growth, China-s economy recovered after late 1962 and foreign trade with market economies grew impressively for about five years. Western trade restrictions were gradually being relaxed after the mid-1950s, and China turned to Western Europe and Japan for large-scale imports of foodgrains, fertilizers, and plants and technology. "From 1963 to 1966 contracts were signed for more than 50 plants worth more than $200 million. A number of the plants were financed under medium-term credits and included the services of Western technicians."/2 China-s trade with centrally planned economies fell to 22% of the total in 1966 and that with market economies correspond- ingly increased. The total value of trade in 1966 approached the previous peak of 1959. 1.09 The Cultural Revolution, which started in late 1966, interrupted production and disrupted transportation, and the trade level fell again in 1968. The continuation of Cultural Revolution activity after 1968, though subdued, prevented the economy and trade from recovering, so that China's total trade value in 1970 was still below the peak of 1966. /1 Richard E. Batsavage and John L. Davie, "China's International Trade and Finance" in Chinese Economy Post-Mao (Joint Economic Committee, US Congress, 1978), p. 710. /2 Batsavage and Davie, ibid., p. 711. Table 1.3: EXPORTS TO AND IMPORTS FROM CENTRALLY PLANNED AND MARKET ECONOMIES, 1950-80 ($ million) Total trade Exports Imports Trade balance With To From With centrally centrally centrally centrally planned With market planned To market planned From market Over- planned With market Year Total economies economies Total economies economies Total economies economies all economies economies 1950 1,135 368 767 552 176 376 583 192 391 -31 - 16 -15 1953 2,368 1,662 706 1,022 717 305 1,346 945 401 -324 -228 -96 1957 3,103 2,065 1,038 1,597 1,129 468 1,506 936 570 91 193 -102 1962 2,663 1,180 1,483 1,490 799 691 1,173 381 792 317 418 -101 1966 4,614 1,014 3,600 2,366 574 1,792 2,248 440 1,808 118 134 -16 1970 4,586 739 3,847 2,260 475 1,785 2,326 264 2,062 -66 211 -277 1975 14,750 2,269 12,481 7,264 1,267 5,997 7,486 1,002 6,484 -222 265 -487 1976 13,433 2,140 11,293 6,855 1,039 5,816 6,578 1,101 5,477 277 - 62 339 1977 14,804 2,276 12,528 7,590 1,321 6,269 7,214 955 6,259 376 366 10 1978 20,638 2,836 17,802 9,745 1,495 8,250 10,893 1,341 9,552 -1,148 154 -1,302 1979 29,332 3,566 25,766 13,658 1,664 11,994 15,674 1,902 13,772 -2,016 -238 -1,778 1980 /a 37,508 n.a. n.a. 18/,121 n.a. n.a. 19,387 n.a. n.a. -1,266 n.a. n.a. /a Estimated from data in domestic currency in the State Statistical Bureau's Communique on the Fulfillment of China's 1980 National Economic Plan, converted at an exchange rate of $1.00 = Y 1.501. Source: Ministry of Foreign Trade. - 416 - 1.10 China's foreign trade began a new course of rapid expansion in the 1970s, with the total value of exports and imports at current prices in 1980 at eight times the 1970 level. Trade relations with many countries, most importantly the USA and Japan, have been greatly improved since the resumption of China's representation at the United Nations in 1971. At the same time, trade with centrally planned countries also picked up after the resumption of annual trade agreements with the USSR and improved relations with Eastern European countries. In current dollars, total trade with centrally planned countries increased at an average rate of about 19% a year during 1970-79, although their trade share continued to fall to 12% in 1979. In the early 1970s, China began to accept credit from Western countries and Japan in purchasing foodgrains, machinery and equipment. On the export side, the most important factor was the emergence of petroleum, the price of which has risen sharply since 1973. In 1977, crude petroleum was the largest export item, accounting for 10% of total export value; its share has since increased rapidly to 17% during the first nine months of 1980. 1.11 However, the trend of rapid trade expansion has not been without interruption. Trade deficits re-emerged in the second half of 1974 because of rising repayments of grain credits and lagging exports due to world recession, as well as sharply higher machinery and equipment deliveries. Also, the last thrust of the Cultural Revolution and the death of key political leaders led to a stagnation of economic activity in 1975/76. The Government began to tighten imports, and the total volume of trade levelled off in 1975 and declined in 1976. Nevertheless, after the present political leadership assumed power, a firm policy of promoting foreign trade as a part of the modernization drive has been established. A number of policy measures for promoting exports were introduced, including such innovative forms of trade as processing imported materials or assembling imported components for export, compensation trade, special economic zones, etc. For more efficient conduct of foreign trade, its management by the state has also been decentralized. At the same time, laws and regulations for attracting foreign investment have been promulgated. These changes, together with the general economic recovery, have resulted in an impressive growth of foreign trade since 1977. 1.12 The increase in the total value of exports accelerated from 11% in 1977 to 28% in 1978, 40% in 1979, and 33% in 1980. The increase was spread fairly evenly among all commodity groups. Exports of oil, textiles and light manufactured products, agricultural sideline products (raw and processed) and nonferrous minerals grew slightly faster than the average, as a result of the sharply higher oil price in 1979 and 1980, recovery of industrial and agri- cultural sideline production (under the new policy of decentralizing decisions to the production team level in rural areas), and the more liberal attitude towards exporting natural resources. Excluding oil, China's total export value during 1970-79 increased at an estimated average annual rate of 20%, or 6-7% in real terms, after allowing for world inflation. This compares - 417 - favorably with slightly below 5% a year during 1953-70 in nominal terms and no more than 3.5% in real terms. While the increase in oil exports was most spectacular, in recent years the increase in manufactured exports was also impressive. During 1976-79, manufactured exports at current prices increased at an annual average rate of 27%, or about 10% in real terms. Thus, even considering the favorable effects of short-term economic recovery, these impressive export growth rates may reflect an underlying strength, indicating a break from the long-term sluggish trend. 1.13 The increase in the total value of imports accelerated faster than that of exports in 1978 and 1979. The rate of growth of imports increased from 10% in 1977 to 51% in 1978 and 44% in 1979. Imports of machinery, equipment, and materials for heavy industry were particularly high in 1978. Cereal imports also increased substantially. The high level of producer goods imports continued in 1979, even when the Government launched a readjustment program in the middle of the year to shift the emphasis from capital construc- tion and investment in heavy industry to agriculture and light industry. In 1980, import growth slowed down significantly to about 23%, but is still sub- stantially higher than the planned 5.8%. The more rapid increase in imports than in exports turned a $0.38 billion trade surplus in 1977 into trade deficits of $1.15 billion in 1978 and of $2.04 billion in 1979. The deficit was, however, reduced to $1.27 billion in 1980, with the slowdown in import growth. 1.14 In short, in the 1970s China's foreign trade has expanded substan- tially, particularly in the second half of the decade. Trade with both centrally planned economies and market economies increased, but that with the latter increased much faster and in 1979 it accounted for 88%, following China's more open policy towards foreign trade and capital. While oil exports have been an important element in the rapid increase in trade during this period, manufactured exports have also increased impressively during the second half of the decade. The increased foreign exchange earnings and acceptance of foreign capital have allowed a corresponding expansion of imports, particularly in plant and equipment for the introduction of modern technology. Commodity Structure of Trade 1.15 In spite of the effects on China's foreign trade of shifting inter- national relations and domestic political movements during the last 30 years, changes in the commodity structure of trade have reflected to a large degree the transformation of the economy and the development strategy adopted. The system of central planning has had a considerable effect on the commodity structure of trade, under which trade has only a balancing role: imports make up domestic production shortfalls and provide necessities that cannot be produced domestically in sufficient quantity, if at all; exports are not viewed as an instrument to promote growth and employment, but merely as a necessity to pay for imports. In addition, through the planned pricing policy, the domestic price structure has been effectively insulated from international prices. However, in recent years, China has paid more attention - 418 - to the role of foreign trade in modernization and development, and foreign trade planning has become less rigid. 1.16 Changes in the Structure of Imports. Before the establishment of the People's Republic, China's foreign trade pattern was similar to that of underdeveloped countries in the nineteenth century, i.e. exporting raw materials and importing consumer and capital goods. The perception that trade had been utilized by the imperial powers to gain political dominance in China was quite widespread. After 1949, imports of consumer goods were drastically cut, except for necessities such as foodgrains. Most of the scarce foreign exchange available was used to import producer goods for reconstruction in industry and transportation. In 1950/51, imports of producer goods (machinery and equipment as well as raw materials) already accounted for 85% of the total and imports of consumer goods only 15% (Table 1.4). Table 1.4: IMPORTS BY BROAD COMMODITY CATEGORIES, 1950-79 1950 1953 1957 1976 1977 1978 1979 Producer goods 87.2 93.0 92.7 86.8 76.1 81.4 81.3 Machinery & equipment n.a. n.a. n.a. 30.9 17.7 17.5 25.2 Raw materials n.a. n.a. n.a. 55.9 58.4 63.9 56.1 of which: for heavy industries n.a. n.a. n.a. (33.7) (32.0) (38.2) (32.9) for light industries n.a. n.a. n.a. (16.5) (19.6) (19.4) (17.3) for agriculture n.a. n.a. n.a. (5.7) (6.8) (6.3) (5.9) Consumer goods 12.8 7.0 7.3 13.2 23.9 18.6 18.7 Sources: SSB, Ten Great Years (Peking, Foreign Languages Press, 1960), p. 176; and Ministry of Foreign Trade. 1.17 In the 1950s, China made great strides in industrialization and agricultural development. The import of large amounts of machinery and equipment from the USSR under a loan program raised the percentage of producer goods imports to about 93% during 1953-57. The rapid pace of industriali- zation during the First Five-Year Plan was similar to that under the USSR's first two five-year plans. Emphasis was placed on basic industries, including electric power, iron and steel, cement and machine building. This large capital goods import program was accompanied by a high level of domestic investment to expand light industries that produce consumer goods, which necessitated considerable imports of raw materials (such as cotton) and oil. At the same time, as peace was restored in the rural areas after a decade of - 419 - warfare and the completion of land reform, agriculture recovered smoothly and developed further. Thus in the 1950s, China imported virtually no grain and in fact was a net grain exporter of 0.5-1.6 million tons of grain (including rice). This, together with the import substitution in manufactured consumer goods, explains why the proportion of consumer goods in total imports was as low as 7% during 1953-57. 1.18 In the 1960s, China's import commodity pattern underwent profound changes. In agriculture, the disturbance of the Great Leap Forward in the late 1950s, bad weather, and errors in economic planning and management created an acute agricultural crisis in the early 1960s. A direct effect on trade of three successive bad harvests was the great increase in foodgrain imports. Constant pressure also came from continuous population growth and the scarcity of arable land. Between 1961 and 1966, China imported 4.5-6.5 million tons of grain, mainly wheat, declining gradually to 3-5 million tons around the end of the 1960s. By taking advantage of the favorable price of rice compared to wheat, China exported considerable amounts of rice to obtain foreign exchange to pay for imported wheat. However, in the 1960s rice exports consistently lagged behind grain imports, and China changed from a net grain exporter to a net grain importer./l To step up agricultural production after the food crises, imports of chemical fertilizers also increased sharply from about 1 million tons in the early 1960s to more than 2 million tons in the early 1970s, although domestic chemical fertilizer output also increased./2 1.19 The rapid buildup of industrial capacity in the 1950s and 1960s increased considerably China's ability to produce machinery and other manufactured goods. This, together with the end of the delivery of Soviet-financed equipment, reduced significantly China's imports of machinery and equipment, but increased its import requirements for intermediate goods, particularly high quality iron and steel materials, nonferrous metals and raw materials. In 1966, imports of crude materials and metals and metal manufactures amounted to one third of China's total imports, as compared with one fifth in 1955. Similarly, while machinery, equipment and military goods together comprised at least one half of total imports in the 1950s, their share fell to about one fifth throughout the 1960s and early 1970s. Clearly China's import-substitution had progressed from consumer goods to capital goods./3 1.20 In the 1970s, the Chinese planners pursued import-substitution still further, this time focusing on intermediate goods, especially steel, chemical fertilizers and synthetic fibers for their manufacturing industries and agriculture. They turned to Western countries and Japan for equipment and modern technology, which involved importing whole plants. For instance, /1 Feng-Hwa Ma, The Foreign Trade of Mainland China (Aldine Atherton, 1971), p. 36. /2 A. Eckstein, China's Economic Revolution (1977); p. 251. /3 Eckstein, ibid., p. 250, Table 7-2. - 420 - during 1973-76, 60 whole plant contracts with a total value of $2.6 billion were signed, of which 60% were for chemical fertilizer, petrochemical and chemical industries and 23% for the steel industry.] In the case of man-made fibers and petrochemicals, imported equipment virtually created new industries. Import-substitution in steel appeared to be less successful. Although steel producing capacity increased by about one third after the mid-1970s, production did not always match demand. Imports of steel products increased sharply from 4.9 million tons in 1976 to 8.5 million tons in 1979 (Table 1.5). Valued at $3.5 billion in 1979, steel was China's largest single import and has accounted for slightly over 20% of total imports for several years. 1.21 Contracts for whole plants and technology imports surged again under the modernization drive of the new political leadership after 1977. They amounted to about $8.5 billion in 1978/79. Actual imports of machinery and equipment increased from $0.9 billion in 1977 to $1.4 billion in 1978 and $2.6 billion in 1979 (Table 1.6). The readjustment policy adopted in mid-1979 still had not had much effect on the reduction of machinery and equipment imports in 1979. In 1980 and early 1981, China decided to carry out further readjustments and therefore cancelled or postponed a number of large import contracts, including some steel, petrochemical, chemical and mining projects. The emphasis has also changed from importing complete plants to importing selected machinery and equipment. 1.22 Another important change in the 1970s was that China changed from a petroleum importer to a petroleum exporter. China used to rely on the USSR and Romania for its petroleum imports, which absorbed about 10% of its export earnings. However, successful geological exploration and oil drilling and development since the early 1960s reduced oil imports to a negligible amount in the late 1960s, and China became a net oil exporter in 1972./2 /1 C. Howe, China's Economy, A Basic Guide (New York, Basic Books, Inc), p. 154, Table 54. /2 UN Statistical Office, World Energy Supplies, Series J, 1950-74. Table 1.5: MAJOR IMPORTS, BY VOLUME AND VALUE, 1976-90 Volume Value ($ million) 1979 1980 1976 1977 197A 1979 1Q77 1978 1979 Jan-Sep Jan-Sen Total Value of Imports ., .. .. 7,214 10,893 15,675 11,417 13,140 Trucks /a (units) 19,248 14,916 21,972 24,768 139 310 450 297 227 Ships and vessels (units) 13 15 29 47 162 156 231 140 208 Airplanes (units) 38 18 13 14 67 43 25 21 43 Steel products ('000 tons) 4,931 5,256 8,638 8,473 1,477 2,699 3,522 2,571 1,304 Cooper (-00f tons) 67.3 91 134 134 111 168 234 168 208 Aluminum ('000 tons) 300.1 150 211 146 150 215 193 135 107 Pig iron (-000 tons) 429.8 1,183 1,391 726 97 130 97 67 43 Iron ore (-000 tons) 1,40.7 2,56R 8,022 7,162 30 109 101 77 70 Natural rubber ('000 tons) 197.6 257 227 246 112 201 290 198 227 Chemical fertilizer (000 tons) 4,5R8.1 6,396 7,333 8,395 340 4R1 655 501 749 Chemicals .. .. .. 402 530 635 464 608 Aqricultural chemicals (006 tons) 45.1 7? 92 82 60 75 110 78 50 Wood pulp (-000 tons) 171.5 216 221 239 55 49 75 48 97 Paper (-000 tons) 154.1 254 364 497 55 102 173 129 139 Watches (-000 units) 763.6 937 2,197 1,876 11 39 31 19 24 Televisions (-000 units) .. 31 89 784 4 12 82 43 37 Tape recorders (-000 units) .. .. .. 201 - - 6 1 12 Cotton ('000 tons) 188.4 181 510 549 318 680 815 580 1,212 Acrylic fibers ('000 tons) 18.6 19 24 26 22 29 32 24 21 Polyester fibers ('000 tons) 94.2 142 180 126 134 157 160 91 209 Polyamide fibers (000 tons) q 11 13 15 28 34 54 31 61 Cereals ('000 tons) 2,337.2 7,014 8,642 11,176 679 949 1,485 1,385 1,482 Soybeans (^000 tons) 29.5 330 190 579 100 52 15Q 66 113 Animal fats and oilseeds ('000 tons)/b 102.5 284 330 2Q8 153 182 194 156 152 Sugar ('000 tons) 577.1 / 1,598 1,299 1,096 342 264 219 168 254 Timber /c ('000 cu m) 737.7 539 535 554 37 50 41 77 108 Cocoa (00 tons) 10.7 12 15 17 31 54 61 61 38 Coffee (-000 tons) 4.3 6 5 4 30 17 11 11 14 /a Includes chassis, trucks, jeens, trailers, cabs, etc. 7T In oil equivalent. 7c Lumber only: does not include other kinds of wood. Sources: Ministrv of Fareign Trade; data on value were given to the IMF by Covernment sources. - 422 - Table 1.6: MERCHANDISE IMPORTS BY COMMODITY GROUP, 1976-79 ($ million) 1976 1977 1978 1979 /a Total Value of Imports 6,578 7,214 10,893 15,674 Technology (whole plant) 1,123 377 469 1,189 Other machinery and equipment 921 907 1,448 2,600 Metals and minerals 2,080 2,207 4,027 4,643 Chemicals 984 1,202 1,595 1,922 Light manufactured goods } } 298 503 Handicrafts 143 187 19 37 Textiles 548 694 1,138 1,284 Food items 659 1,453 1,679 2,418 Livestock and related products 121 188 220 234 /a Components do not add to the total for 1979. Source: Ministry of Foreign Trade. 1.23 Imports of cereals, normally the second largest item, continued to fluctuate with the harvest during the first half of the 1970s, but increased continuously during the second half. Several good harvest years cut back grain imports in 1971, but the poor harvest in 1972/73 necessitated sharp increases in grain imports. A good crop in 1974 permitted China to almost halve the 1974 level of wheat and corn imports (to 3.3 million tons) the following year. However, following the difficult year of 1976, cereal imports (excluding soybeans) again increased, to 7 million tons, and reached to 11.8 million tons in 1979. During the first nine months of 1980, cereal imports had reached $1.48 billion, the level for the whole of 1979 (see Table 1.5). Cereals account for about 11% of total imports. With continuous population growth and limited agricultural land, the long-term rising trend is likely to continue. 1.24 China relies heavily on imported cotton for its textile industry. Cotton is the third largest import item. Valued at $815 million in 1979, cotton accounted for 5.2% of total imports (see Table 1.5). 1.25 The share of consumer goods imports, after reaching a low in the 1950s, recovered to about 13% in 1976 and rose considerably during 1977-79 to an average of 20%. This reflects partly large cereal imports and partly the policy of economic readjustment to improve living standards. - 423 - 1.26 Changes in the Structure of Exports. Changes in China's economic structure are also reflected in the composition of its commodity exports. In 1953, about 82% of China's total exports were agricultural and processed agri- cultural products. With rapid industrial development, and growing domestic consumption, this share fell to 72% in 1957, and to about 60% in 1976./1 Another important factor in this decrease was the dwindling of soybean and oil seeds exports in the agricultural depression years of the early 1960s. 1.27 On the other hand, exports of light manufactured goods, particularly textiles, have sustained a steady long-term increase. The share of textile exports in the total increased from 8.8% in 1955 to about 18% in 1959 and 1970, and 21.4% in 1979. Textile exports were maintained through economically difficult years by cutting domestic rations to the minimum. Recently textile output has expanded considerably and rationing has been liberalized. However, textile exports still compete with domestic consumption. Other light manu- factured goods that exhibited a steady rise in exports (mostly to developing countries) are thermos bottles, ballpoint pens, watches and furniture. In 1979, total textile and light manufactures exports accounted for 35.5% of the total (Table 1.7). 1.28 An important change in the commodity composition of China's exports in the 1970s was the emergence of oil as a major export item. Crude oil exports reached 8.5 million tons in 1976 and 13.4 million tons in 1979 (Table 1.8). In addition, because of the sharp increases in oil prices in recent years, the share of crude oil in China-s total export value increased from 10% in 1977 to 12.8% in 1979 and 17.2% in the first nine months of 1980 (Table 1.8). For all "mineral fuels, lubricants and related materials" (SITC 3), the export share increased from 13.7% in 1976 to 19.5% in 1979 (see Table 1.7). 1.29 Nonetheless, manufactured exports still accounted for 46% of China's total exports in 1979. This proportion is high compared with those of most other developing countries at the same income level and reflects China's greater industrialization, due partly to the large size of the country and partly to its chosen development strategy. Textiles and light manufactured goods still account for the major proportion of total manufactured exports, and heavy and chemical industrial products for only a small proportion (11% of total exports in 1979). Thus despite China's emphasis on the development of machinery and chemical industries, these are apparently not yet efficient enough to tap the world market. Agricultural exports (raw and processed) accounted for one third of total exports and are still an important source of foreign exchange. /1 SSB, Ten Great Years and Ministry of Foreign Trade. Table 1.7: MERCHANDISE EXPORTS (SITC CATEGORIZATION), 1976-79 ($ million) 1976 1977 1978 1979 Value Share Value Share Value Share Value Share (%) (%) (%) (%) Total Value of Exports 6,855 100.0 7,590 100.0 9,745 100.0 13,658 100.0 Primary Products: 3,744 54.6 4,065 53.6 5,216 53.5 7,315 53.6 Food and animal products mainly for use as food (1,661) (24.2) (1,797) (23.7) (2,316) (23.8) (2,701) (19.8) Beverages and tobacco (62) (0.9) (71) (0.9) (71) (0.7) (86) (0.6) Nonedible raw materials (excluding fuels) (1,038) (15.2) (1,088) (14.3) (1,417) (14.5) (1,804) (13.2) Mineral fuels, lubricants and related raw materials (924) (13.7) (1,068) (14.1) (1,345) (13.8) (2,654) (19.5) Animal and vegetable oil, fats and wax (41) (0.6) (41) (0.6) (67) (0.7) (70) (0.5) Industrial Products: 3,111 45.4 3,525 46.4 4,510 46.5 6,343 46.4 Heavy and chemical industrial products 808 11.8 851 11.2 1,010 10.4 1,497 10.9 -Chemical and related products (198) (2.9) (184) (2.4) (234) (2.4) (424) (3.1) -Machinery and transport equipment (238) (3.5) (296) (3.9) (332) (3.4) (464) (3.4) -Other heavy industrial products (372) (5.4) (371) (4.9) (444) (4.6) (609) (4.4) Light industrial and textile products 2,303 33.6 2,674 35.2 3,519 36.1 4,846 35.5 Source: Ministry of Foreign Trade. Table 1.8: MAJOR EXPORTS, BY VOLUME AND VALUE, 1976-80 Volume Value ($ million) 1979 1980 1976 1977 1978 1979 1977 1978 1979 Jan-Sep Jan-Sep Total Value of Exports .. .. .. .. 7,590 9,745 13,657 9,515 12,982 Cereals ('000 tons) 1,474.9 1,365.1 1,682.8 1,542.1 361 516 489 364 392 Rice ('000 tons) 876.1 1,032.9 1,435.2 1,053.1 256 442 338 215 324 Soybeans ('000 tons) 199.2 129.5 112.9 305.9 41 32 98 77 24 Beans ('000 tons) 84.4 55.4 45.8 67.2 42 24 31 26 17 Other cereals ('000 tons) 211.9 147.3 88.9 115.9 23 17 22 13 20 Groundnut oil ('000 tons) 13.7 4.3 11.2 17.4 5 13 17 15 19 Groundnut kernel ('000 tons) 28.4 14.9 18.1 35.2 13 18 36 31 55 Fresh eggs ('000 jin) 69,700 67,620 81,170 99,510 32 38 46 36 37 Live hogs ('000 head) 2,310.8 2,313.0 2,462.8 2,422.1 169 179 197 150 150 Frozen pork ('000 tons) 38.4 26.2 42.8 44.9 45 70 72 52 81 Frozen rabbit meat ('000 tons) 28.5 27.8 39.3 43.5 90 53 53 39 33 Aquatic products ('000-tons) 93.4 87.7 92.0 97.8 158 258 148 269 267 Fruit ('000 tons) 198.5 227.9 251.0 259.1 67 82 95 41 45 Canned fruit ('000 tons) 197.8 183.3 222.2 286.3 150 202 273 195 253 Beer ('000 cases) .. 1,354.3 1,162.4 1,247.4 7 6 6 5 7 Cotton yarn ('000 bales) 146.1 117.5 128.8 133.7 52 57 68 48 60 Cotton cloth ('000 meters) .. 771,610 1,095,640 1,108,830 400 580 699 490 50 1 Filature silks (tons) 6,483 5,022 8,739 9,040 130 255 271 211 223 4 Silk and satin materials ('000 meters) 115,546.9 95,220 123,520 145,750 136 200 263 181 17 Woolen materials ('000 meters) 8,546 6,630 6,390 12,650 26 25 47 34 4 Tea ('000 tons) 61.2 81.8 86.9 106.8 158 186 230 156 166 Resin ('000 tons) 160.5 127.4 142.1 183.9 50 52 78 58 59 Jute bags ('000) 27,800 24,200 37,550 52,850 8 14 23 18 37 Bristles ('000 cases) 139.5 140.8 130.5 174.7 59 55 80 57 48 Bristle brushes ('000 dozens) 2,739.6 3,860.0 4,180.0 5,770.0 10 19 18 12 16 Camel hair (tons) 580 669 623 1,019 4 3 6 5 3 Rabbit hair (tons) 1,970 1,876 2,250 2,675 28 42 60 41 82 Carpets, superior quality handmade ('000 square meters) 343.8 501.5 740.2 850.4 38 61 83 58 69 Goat skin ('000 hides) 5,304 6,840 8,160 11,010 21 26 53 38 42 Fur mattresses ('000 pieces) 4,076.6 3,030 5,090 6,350 50 65 88 69 73 Paper ('000 tons) 131.5 104.1 134.0 161.2 44 57 78 57 69 Sewing machines ('000 units) 336.0 284.0 386.3 496.7 12 18 21 14 15 Bicycles ('000 units) 392.8 375.9 302.8 642.1 13 12 26 16 28 Porcelain ('000 pieces) 542,190 629,810 568,030 740,330 80 83 117 77 9 Tin ('000 tons) 7.8 5.6 5.5 4.6 57 65 67 46 42 Antimony ('000 tons) 2.5 7.7 11.5 12.5 22 26 37 27 18 Tungsten ('000 tons) 20.5 13.6 18.2 21.3 149 172 203 126 119 Coal ('000 tons) 2,270 2,630 3,120 4,630 70 100 177 121 196 Crude oil ('000 tons) 8,495.9 9,110 11,310 13,430 773 958 1,750 1,173 2,234 Paraffin wax ('000 tons) 84.5 49.6 62.7 66.0 14 24 31 20 38 Tires ('000 sets) 299.5 269.8 289.3 414.8 20 20 23 17 23 Machine tools (pieces) 4,366 4,296 4,805 6,556 18 22 31 18 35 Sources: Ministry of Foreign Trade; data on value were given to the IMF by Government sources. - 426 - The Direction of Trade 1.30 The great swing in the direction of trade, away from centrally planned economies and towards market economies, was completed by the final repayment of the Soviet aid in 1966. In 1953 when the delivery of Soviet aid equipment was well under way, 70% of China's trade was with centrally planned economies. By 1966, China's Soviet debt had been fully repaid through commodity exports, and the share of China's trade with the centrally planned economies fell to 22% (trade relations with the USSR virtually ceased). As China increasingly turned to the market economies for both imports and exports, the share of the centrally planned economies in China's total trade declined further to 12% in 1979. 1.31 In the last few years, there has been little change in the direction of China's exports, except for the rise in Japan's share. Hong Kong has been China's largest single export market (except in 1979), accounting for about one quarter of Chinese exports (Table 1.9). An unknown, but substantial, proportion of Chinese exports to Hong Kong is re-exported, mostly to developing countries. Agricultural products, such as live hogs, meat, eggs, aquatic products, fruits, vegetables, etc., are, however, largely consumed in Hong Kong. Japan, which purchases mostly oil and coal, is the second largest market, accounting for 20% of China's total exports. The substantial rise in the price of oil, as well as the increased volume of oil and coal shipped to Japan, accounts for the increase in Japan's share in 1979 and 1980. Other industrialized countries, led by the USA, the UK and the Federal Republic of Germany take about 20% of China's exports, and another 20% goes to developing countries other than Hong Kong. 1.32 In 1979, one fourth of China's total imports came from Japan. The next highest share came from the USA, which increased its share sharply from 1.6% in 1977 to 18.3% in the first nine months of 1980, thus surpassing the shares of the Federal Republic of Germany, France, Canada, Australia and the UK. The sharp increase in imports from the USA was largely due to the increased imports of foodstuff and the resumption of diplomatic relations between the two countries in the beginning of 1979. 1.33 In general, China has a small trade surplus with the centrally planned economies, with accumulated assets of about $400 million by the end of September 1980; a large trade surplus, totaling $3.8 billion in 1979, with developing countries (except with Latin American countries), including Hong Kong (with which it had a surplus of $2.1 billion in 1979); and a huge deficit, totaling $5.6 billion in 1979, with market economy countries. The USA, Japan and the Federal Republic of Germany shared the leading position in China's trade deficit in 1979, with about $1.2 billion each. For the USA, the deficit mainly results from China's large imports of foodgrain and cotton, and for Japan and the Federal Republic of Germany, from the imports of machinery and equipment, as well as intermediate goods, including steel, and chemical and petrochemical products. Table 1.9: DIRECTION OF TRADE, 1977-80 Exports ($ million) Imports ($ million) Exports (%) Imports (%) Trade balance 1977 1978 1979 1980 1977 1978 1979 1980 1977 1979 1977 1979 1977 1979 (Jan-Sep) (Jan-Sep) Industrial Countries USA 179.6 270.7 595.0 718.0 114.6 721.1 1,856.6 2,401.2 2.4 4.4 1.6 11.8 65.0 -1,261.6 Canada 80.0 94.8 145.1 100.5 460.6 574.0 622.4 607.4 1.1 1.1 6.4 4.0 -380.6 -477.3 Australia 100.9 117.6 156.1 125.7 517.9 715.1 985.2 861.8 1.3 1.1 7.2 6.3 -417.0 -829.1 Japan 1,356.7 1,718.7 2,764.1 2,932.7 2,108.5 3,105.2 3,944.0 3,157.0 17.9 20.2 29.2 25.2 -751.8 -1,179.9 France 141.5 178.4 234.0 250.1 279.2 247.1 406.2 209.9 1.9 1.7 3.9 2.6 -137.7 -172.2 Federal Rep. of Germany 260.8 329.5 459.2 519.6 529.8 1,030.1 1,739.4 928.8 3.5 3.4 7.3 11.1 -269.0 -1,280.2 Italy 112.2 165.5 302.8 273.0 95.9 190.9 308.7 1,764.0 1.5 2.2 1.3 2.0 16.3 -5.9 Belgium 28.0 36.8 66.4 64.8 37.6 80.2 106.7 48.0 0.5 0.5 0.5 0.7 -9.6 -40.3 Netherlands 66.7 92.2 136.9 142.7 39.5 125.8 200.0 81.2 0.9 1.0 0.5 1.3 27.2 -63.1 Spain 19.0 21.9 56.0 39.1 17.9 50.4 91.7 28.9 0.3 0.4 0.2 0.6 1.1 -35.7 Sweden 48.1 47.2 75.0 61.3 38.2 74.1 112.6 58.0 0.6 0.5 0.5 0.7 9.9 -37.6 Switzerland 86.0 103.4 169.3 197.5 170.7 299.2 207.6 168.4 1.1 1.2 2.4 1.3 -84.7 -38.3 UK 251.0 370.4 478.9 397.4 279.4 296.3 501.2 431.3 3.3 3.5 3.9 3.2 -28.4 -22.3 Developing Countries Africa Nigeria 32.6 43.7 24.7 38.0 12.4 - 7.9 4.9 0.4 0.2 0.2 0.1 20.2 16.8 Sudan 42.4 38.2 44.7 24.0 51.6 54.9 89.3 54.6 0.6 0.3 0.7 0.6 -9.2 -44.6 Tanzania 13.0 23.7 16.4 6.1 20.5 18.2 1.9 9.2 0.2 0.1 0.3 .. -7.5 14.5 Zambia 9.3 1.9 1.6 5.9 28.9 31.8 59.5 56.7 0.1 .. 0.4 0.4 -19.6 -57.9 As ia Indonesia - 0.2 - 3.1 2.0 0.4 - 12.0 - - .. - -2.0 - Hong Kong 2,012.0 2,668.0 3,548.0 3,044.6 136.2 74.7 214.4 336.4 26.5 26.0 1.9 1.4 1,875.8 3,333.6 Malaysia 94.0 163.1 171.4 129.6 105.3 111.2 189.1 115.3 1.2 1.3 1.5 1.2 -11.3 -17.7 Pakistan 63.9 89.3 121.8 86.6 8.5 43.0 30.2 136.2 0.8 0.9 0.1 0.2 55.4 91.6 Philippines 60.6 86.3 134.7 188.9 33.1 57.2 47.2 44.3 0.8 1.0 0.5 0.3 27.5 87.5 Singapore 202.1 247.9 296.5 256.8 76.1 46.3 104.7 149.9 2.7 2.2 1.1 0.7 126.0 191.8 Middle East Iran 52.5 65.0 36.5 102.6 48.0 53.5 31.4 56.5 0.7 0.3 0.7 0.2 4.5 5.1 Iraq 83.7 69.1 134.7 108.8 23.0 56.8 48.6 117.1 1.1 1.0 0.3 0.3 60.7 86.1 Kuwait 94.5 93.0 136.2 123.5 20.9 33.1 38.7 20.4 1.3 1.0 0.3 0.2 73.6 97.5 Libya 43.4 37.1 22.6 3.2 - - - - 0.6 0.2 - - 43.4 22.6 Egypt 55.4 53.7 69.4 70.3 37.2 62.9 56.5 96.6 0.7 0.5 0.5 0.4 18.2 12.9 Western hemisphere Argentina 1.2 2.3 16.2 21.9 116.5 89.6 271.2 155.8 .. 0.1 1.6 1.7 -115.3 -255.0 Brazil 0.3 8.0 93.5 184.3 19.5 74.4 122.4 45.4 .. 0.7 0.3 0.8 -19.2 -28.9 Chile 2.9 6.0 10.7 13.2 14.6 38.7 86.4 79.2 .. 0.1 0.2 0.6 -11.7 -75.7 Mexico 1.2 6.3 9.0 13.4 50.7 103.1 102.5 69.0 ., 0.1 0.7 0.7 -49.5 -93.5 Socialist Countries North Korea 227.2 230.7 317.0 328.6 147.2 223.6 330.2 223.4 3.0 2.3 2.0 2.1 80.0 -13.2 USSR 176.5 229.7 242.2 140.0 152.6 206.9 250.4 159.7 2.3 1.8 2.1 1.6 23.9 -8.2 Viet Nam 51.7 16.3 - - 27.7 40.7 - - 0.7 - 0.4 - 24.0 - Poland 62.9 105.1 142.9 90.0 79.6 65.5 166.5 152.0 0.8 1.0 1.1 1.1 -16.7 -23.6 Czechoslovakia 81.1 119.1 112.6 83.0 93.2 109.0 161.6 107.5 1.1 0.8 1.3 1.0 -12.1 -49.0 Hungary 34.7 57.6 61.7 30.6 33.4 48.8 80.5 68.8 0.5 0.5 0.5 0.5 1.3 -18.8 German Dem. Rep. 121.1 162.2 197.9 135.4 131.7 152.5 197.6 227.2 1.7 1.4 1.8 1.3 -10.6 0.3 Romania 254.3 396.3 490.1 363.2 272.9 368.8 603.7 342.9 3.4 3.6 3.8 3.9 -18.6 -113.6 Yugoslavia 43.7 58.4 48.4 22.6 45.8 29.2 50.3 90.3 0.6 o.4 0.6 0.3 -2.1 -1.9 Total 71590.0 9 1 13,009.3 7,214.0 10,893.0 15,675.0 13,140.0 376.0 -2,017.0 Source: Mostly from the Ministry of Foreign Trade. - 428 - 2. THE INSTITUTIONAL SETTING 2.01 Shortly after the establishment of the People-s Republic, the Government built up a comprehensive set of institutions to manage foreign trade. It moved from a strict licensing system to a state trading system after the agricultural sector had been largely collectivized and the indus- trial sector largely nationalized. After 1956, foreign trade was a state monopoly, with no major organizational changes up to 1978. 2.02 Since this system placed significant power in the hands of the state, the Government was able to use foreign trade to further not just economic but also political objectives. Although the direction, emphasis and priority of these objectives have changed during the last 30 years, the main objectives remain unchanged, i.e. strengthening national sovereignty, self- reliance and modernization of the country. In pursuing these objectives, the Government believed foreign trade and other international transactions should follow the principle of equality and mutual benefits. This attitude was greatly influenced by the perception that trade had been utilized by the imperial powers before 1949 to gain political dominance in China, that trade linked with aid should forge important ties with friendly socialist and Third World countries, and that trade with other countries could only be increased with full diplomatic relations. These considerations are reflected in the changes of direction in China's foreign trade (paras. 1.30-33). 2.03 Since 1977, after the Cultural Revolution, the country's priority objective in foreign trade has clearly been modernization, with a more flexible interpretation of self-reliance. Emphasis has been placed on the economic gains to be derived from foreign trade and capital. Parallel with the reform of the economic system, steps have been taken to decentralize foreign trade management. Also, innovative measures have been introduced to promote foreign trade and investment. Accordingly, organizations that deal with foreign trade and finance have been changed considerably, but it is too early to speculate on what their final form will be. The Basic Organizational Framework 2.04 Before the recent moves towards decentralization, China had a completely centralized foreign trade system, with the Ministry of Foreign Trade (MOFT) at the center. The MOFT, established in 1952, is primarily responsible for planning, supervising and conducting foreign trade. In conjunction with the State Planning Commission (SPC), it draws up the annual and medium-term foreign trade plans. The MOFT and its overseas represent- atives may sign trade agreements with governments that have full diplomatic relations with China. It controls foreign trade corporations (FTCs), which each have a monopoly over the import and export of a specific group of commodities (the present 16 FTCs are listed in Appendix A). The FTCs were the only units under the MOFT allowed to sign foreign trade contracts and conduct - 429 - foreign trade /1 before the recent organizational changes. Other agencies officially under the jurisdiction of the MOFT are the General Customs Administration and the General Administration for Inspection and Testing of Commodities, as well as the China Council for the Promotion of International Trade. 2.05 Each province, autonomous region and centrally administered munici- pality has a Foreign Trade Bureau (FTB), and many localities have FTB branch offices. These lower level foreign trade administration and planning bodies are vertically under the MOFT, but they also receive guidance, supervision and assistance from the regional government; the MOFT is dominant in this "dual leadership" system. In parallel, the FTCs maintain branches in most provinces and local offices in areas where trade in their product lines is particularly important. These local branches and offices have traditionally been under the vertical leadership of their respective FTCs, but they also receive guidance, supervision and assistance from the regional or local FTBs, with the former dominating. Recently, important changes have been introduced that affect these relationships (see para. 2.13). 2.06 In line with the foreign trade plan, the FTCs procure goods domestically and sell them abroad, surrendering the foreign exchange earned to the Bank of China. The FTCs also purchase goods abroad for production and other purchasing units, under import licenses issued by the MOFT according to the foreign trade plan; foreign exchange for these purchases is allocated by the Bank of China and the State General Administration for Foreign Exchange Control according to the foreign exchange budget. The FTCs engage directly in foreign trade and are "independent accounting units". The monopoly trading power of the FTCs has been the main factor in the close central control over the level, direction and composition of exports and imports. 2.07 This centralized organizational structure was appropriate when the principle of self-reliance was followed, or when foreign trade was conducted mainly with countries that had similar, centrally planned economies. However, since 1976, when modernization has been emphasized as a goal, the Chinese authorities' attitude towards foreign trade has become increasingly more positive and China-s trade policy has been made increasingly more flexible. Self-reliance is now seen as a long-term objective, and the introduction of modern technology is regarded as a means of eventually achieving it. More- over, the international division of labor is increasingly recognized as advantageous to China's modernization, although it is still considered to be subordinate to the general aim of establishing an independent and integrated socialist economic system. /1 Some other agencies that are authorized to trade but do not come directly under the MOFT are: Guozi Shudian (International Book Store), China National Publications Import Corporation, and China Film Corporation. No changes were made in their positions as a result of the recent decentralization. - 430 - Decentralization of Foreign Trade Management 2.08 With the lion's share of its trade now being conducted with market economy countries, and the level of such trade increasing fast in recent years, China has found its centrally managed trade structure too rigid and inefficient. The FTCs cannot follow closely changes in the world market situation, as well as technical characteristics of the many exports produced in various parts of such a big country and of imports required by so many different agencies and enterprises. With no direct contact between end users and foreign suppliers or between domestic suppliers and foreign buyers, trade negotiations through intermediaries (i.e. the FTCs) tend to be prolonged and good market opportunities are missed. Thus, since 1978, China has introduced significant organizational reforms to decentralize foreign trade management in two directions: laterally to other ministries and vertically or geographic- ally to local government levels. In addition, new agencies are also being established at various administrative levels to institute the recently adopted policy measures to promote exports, introduce foreign technology and attract foreign investment. 2.09 Supra-Ministerial Level. Two new commissions, the Foreign Investment Control Commission (FICC) and the Import-Export Commission (IEC), were recently established under the State Council to supervise and coordinate the work of ministries and other agencies that deal with foreign trade and investment matters. These new agencies have a status roughly equivalent to that of the other state commissions. The IEC, the most recently established, apparently shares staff temporarily with the FICC, and the division of labor between the two commissions has yet to be clarified. The FICC appears to be concerned primarily with the approval of joint ventures, foreign investment and technology introduction. The IEC is concerned primarily with foreign trade policy guidelines, treaties and laws, foreign trade agreements, large foreign trade ventures and special trade practices. The IEC may also have broad authority in determining the overall foreign trade plan, in conjunction with the MOFT and SPC, and in supervising and coordinating the foreign trade activities of entities not under the jurisdiction of the MOFT. The SPC and the MOFT seem to have retained primary responsibility for "normal" or "tradi- tional" trade, while such new trade practices as compensation trade, export processing and joint ventures are under the authority of the FICC/IEC. 2.10 Another new institution is the China International Trust and Investment Corporation (CITIC), established on July 8, 1979. The CITIC is a business organization in charge of negotiating joint ventures, finding appropriate Chinese partners, and coordinating the introduction of foreign investment and technology. It has branches in several Chinese cities, as well as a Hong Kong branch, which operates with considerable independence. However, final approval of foreign investment rests with the FICC. - 431 - 2.11 Ministerial Level. Several new export and import corporations have been established under the production ministries to conduct foreign trade directly. Corporations under the production ministries are responsible for the plants and other facilities used in production; they and their subordinate enterprises are the end users of producer goods imports, and they thus have the technical expertise to negotiate the import of complex technology, machinery and equipment. With the recent increased access to such imports, representatives of these corporations have been allowed to handle technical negotiations with foreign suppliers, while the FTCs handled commercial negotiations and signed contracts. These corporations could not discuss their exportable products with foreign customers. Usually, they were not fully aware of international market needs and trends, so some have continued to produce goods unfit for export, which has resulted in accumulating stocks, particularly of machinery products. 2.12 For these reasons, some of the production ministries are now allowed to organize their own export and import corporations. The corporations have the authority to conduct technical as well as commercial negotiations with foreign firms and to sign contracts, thus bypassing the FTCs; they also coor- dinate contacts between foreign suppliers or buyers and the enterprises. There are 17 of these corporations directly conducting foreign trade in light industrial products, electronics, general industrial machinery equipment, precision machinery, scientific instruments, mining equipment and minerals, aircrafts, etc. (see Appendix B). In ministries that have yet to form export- import corporations, the production corporations (such as the China Petroleum Corporation and China National Chemical Fibers Corporation) may also discuss projects with foreign firms. 2.13 Local Government Level. The authority to directly conduct foreign trade has been granted to several provincial and municipal governments. The local governments may organize foreign trade corporations to handle foreign trade, as well as transportation, chartering, warehousing, packaging and advertising, in their province or municipality. They can communicate directly with foreign enterprises to pursue trade and investment ventures within their own jurisdictions. These local corporations direct the operations of the local FTC branches, which, however, still report to the national FTCs on planning and budgeting matters. The dominant role in the dual leadership system has thus shifted to the local foreign trade corporations, whose authority to conduct foreign trade directly puts them in a better position to coordinate the activities of the various local FTC branches and to promote more vigorously the interests of local foreign trade and economic development. The municipalities of Beijing, Tianjin and Shanghai, the coastal provinces of Guangdong, Fujian, Liaoning and Hebei, and the Guangxi autonomous region have all formally established local foreign trade corporations./l 2.14 In addition, several local trust and investment corporations have been set up to interest foreigners or overseas Chinese in investing in local /1 China's Foreign Trade, Beijing, January 1981. - 432 - enterprises, by finding Chinese partners for joint ventures, compensation trade and other kinds of projects. One of them (the Fujian Investment Enterprise Corporation) is also authorized to float bonds outside China to finance local projects. The functions of these corporations are much like those of the CITIC for the country as a whole, but the corporations are not subordinate to the CITIC; the CITIC seems to focus on relatively large projects while local corporations normally deal with smaller projects. Four such corporations have been established so far, in Beijing, Shanghai, Tianjin and Fujian. 2.15 Special Economic Zones. Special economic zones are being estab- lished in the two coastal provinces of Guangdong and Fujian, which are adjacent to Hong Kong, Macao or the South China Sea. The zones are, in particular, intended to attract foreign investment in light and manufacturing industries catering to export markets. Special facilities, including infra- structure and services, are to be provided and preferential tax treatment granted to the enterprises (see paras. 3.23-3.26 below). The zones are administered directly by the provincial authorities, with a simplified bureaucracy and broad investment guidelines. At the August 1980 session of the National People's Congress, detailed regulations were approved governing the three economic zones in Guangdong, which are near the cities of Shenzhen (next to Hong Kong), Zhuhai (near Macao) and Shantou (near the Fujian border). Applications for investment, joint ventures and other undertakings are to be submitted to the Guangdong Provincial Administration Committee in Charge of the Special Economic Zones. The Guangdong Provincial Special Economic Zones Development Company is to be set up to take part in fund raising and trust investments, operate joint venture enterprises, act as an agent in business transactions with other parts of China, and provide services for business negotiations. In late 1980, the Xiamen (Amoy) Special Economic Zone Administration Committee (in Fujian) was established to plan, build and administer the Huli subzone. 2.16 Summary. All these efforts towards decentralization in foreign trade management aim at bringing more direct contacts between Chinese exporters and foreign markets, and between Chinese end users and foreign suppliers (as well as between Chinese enterprises and foreign investors). This would allow traders to develop an intimate knowledge of their markets, as well as to save time and seize trading opportunities - none of which would be possible if all export and import trade arrangements still had to go through the FTCs. However, it is not clear how far the decentralization will go in allowing individual enterprises to conduct foreign trade independently as the economic system is reformed. Some enterprises have made direct contact with foreign firms, obviously on a trial basis. But competition among the Chinese enterprises and their ignorance of world markets (for instance, in the case of porcelain exports) have brought export prices down considerably. Current thinking in China appears to favor organizing trade associations among enter- prises in the same lines of production and letting these associations conduct foreign trade for their member enterprises. This represents a further step towards decentralization and could be more business oriented and efficient than the existing system. Nonetheless, the bulk of China's foreign trade is currently still carried out by the FTCs. - 433 - 3. NEW MEASURES FOR PROMOTING FOREIGN TRADE AND INVESTMENT 3.01 China has recognized that some innovative export promotion measures adopted by other successful developing countries have the advantages of earn- ing additional foreign exchange, providing new jobs, introducing modern technology and improving the quality of products. Thus, since late 1978, China has become more flexible and imaginative in adopting new measures (summarized below) to promote trade and attract foreign capital. It no longer relies only on simple procedures and sales contracts with cash payments. It has agreed to use foreign designs, specifications, trademarks, raw materials, components and equipment, and increasingly it is using advertising. It is also eager to gain access to international markets through the connections of foreign firms. Export Processing 3.02 Under this arrangement, foreign firms supply raw materials, semi- finished goods, packaging materials and/or components, while the Chinese enterprises process or assemble products according to foreign contractors' designs, specifications and quality requirements. All the products are passed on to the foreign contractors or their agents, and the Chinese enter- prises receive a processing fee. All the machinery and equipment used are Chinese made, unless specific machinery and equipment needed are not avail- able in China, in which case they can be imported and the cost is deducted from the processing fee. Imported materials, components, etc. are exempted from duties and taxes, but the volume of these imports has to be appropriate for the amount of final products; none of them may be used for products sold in domestic markets. At present, the processing fees in garment, textile, yarn, and cloth-making enterprises are cheaper than the corresponding costs in Hong Kong and Macao, not to mention Japan, because wage rates are lower in China. The Chinese firms engaged in export processing of these articles are profitable. 3.03 By the end of June 1980, 18 provincial, municipal and autonomous regional governments had begun export processing operations and compensation trade (see paras. 3.05-3.08 below). Most of the export processing enterprises are located in the special economic zones near Hong Kong and Macao and the two large industrial cities, Shanghai and Tianjin. There were about 6,300 export processing projects, largely operated by medium-sized and small plants; 70% of the projects were with Hong Kong and Macao, 20% with Japan, and 10% with other countries. From July 1978 to the end of June 1980, China received a total of $60 million in export processing fees; this figure is expected to increase to $100 million by the end of 1980. Between mid-1978 and mid-1980, China imported about $96 million of equipment for export processing. 3.04 The advantages of processing for export are obvious. This arrange- ment provides more stable sources of supply of material inputs than domestic sources. Also, export processing operations earn foreign exchange, create - 434 - employment and utilize excess industrial capacity. In addition, they allow Chinese enterprises to become familiar with foreign markets and modern ideas, as well as helping to introduce modern equipment. Compensation Trade 3.05 Under this mode of trade, China provides the factory building and labor, while foreign firms supply capital, equipment, technology, training, designs, and possibly supervisory personnel. Foreign firms are either paid directly by the goods produced or indirectly by other products agreed upon by both sides. In the case of indirect compensation, for instance, imported beer brewing equipment can be paid for by starch or wheat germ rather than by beer, if the latter is in oversupply on foreign markets. The beer so saved is sold on the domestic market, where beer is in short supply. However, indirect compensation trade agreements are rare, as they involve rather complicated negotiations and there are difficulties in reaching agreements. Once all the payments are made, the equipment becomes entirely Chinese owned. 3.06 From mid-1978 to mid-1980, agreements on about 330 compensation trade projects were signed with medium-sized and small industries; 60% of the projects were with Hong Kong and Macao, and 34% with Japan. In terms of project value, however, Japan accounted for 47% and Hong Kong and Macao only 41%. By industry, textile, garment and silk fabric enterprises accounted for one half; other light industries for one fourth; and firms producing chemi- cals, metal and minerals, machinery and food for the remainder. In most cases, it will take 2-3 years to pay for the equipment imported, but for some relatively large projects, 7-8 years. 3.07 Compensation trade has an advantage over direct foreign investment in that equipment ownership and management are all in the hands of the recipient country. (Compensation trade is in fact practised by the USSR and East European countries.) The main financial advantage of this form of trade is that it allows machinery and equipment to be imported without cash payments in foreign exchange; thus it helps the importing country in maintaining a trade balance. However, it also entails many difficult problems. For instance, deciding how many and what kinds of products are required, and over what period, in exchange for what kinds of equipment. Normally this would be decided based on prices prevailing in international markets when the contract is signed. However, because the Chinese negotiators were unfamiliar with international markets and the equipment, they seem to have had bad experiences in some of these deals: the equipment imported was inappropriate (by being so advanced and automatic that it was difficult to handle or it generated too few jobs), or sometimes it was obsolete and became less useful even before it was fully paid for; in some cases the quality of products has been a cause for dispute, and any rejection of products causes losses; in still other cases, unfavorable world market developments have hampered sales of finished products and prices had to be cut, thus reducing profits. Moreover, foreign contractors who are interested in selling equipment to China may not be in - 435 - the business of marketing the finished products internationally, and they would therefore be reluctant to enter into compensation trade agreements. Exports under medium-sized and small compensation trade contracts have so far been minimal and involved ony about 20-30 product lines. 3.08 All export processing and compensation trade projects of over $1 million in the provinces and smaller municipalities and of over $3 mil- lion in the three large municipalities (Beijing, Tianjin and Shanghai) are subject to the approval of the Import and Export Commission; those below the above ceilings can be approved by the local governments. For very large compensation trade projects involving the development of coal, petroleum, iron and steel, and other resources, however, the prime responsibility for negotiation and implementation rests with the relevant ministries. Cooperative Production 3.09 This type of arrangement is halfway between compensation trade and joint ventures (see paras. 3.12-3.21 below). It is a form of technology transfer whereby a foreign firm helps a Chinese enterprise to set up a factory and produce an item under license, by giving extensive technical assistance in stages. In the early stages, the Chinese enterprise imports a large proportion of parts and components and completes the final assembly in its own factory. Gradually, the Chinese enterprise takes on more complex parts of the manufacturing process, until after several years it can complete the product entirely or mostly from its own materials and components./l Normally, a Chinese FTC or ministry imports equipment and technology to construct a new assembly line or a new workshop in an existing factory or service industry./2 Payment is often made by supplying over an extended period, either free or at a discount, a share of the output generated by the facilities built or modernized with foreign assistance. Negotiation of these contracts can be very complicated, as they involve such issues as quality control over the resulting products, costs and prices of the products and equipment, payment guarantees, and insurance of the equipment. No equity investment by the foreign partner is involved, as the facilities are entirely Chinese owned. 3.10 Cooperative production appears to be motivated by the consideration that greater "learning" of foreign technology and greater foreign exchange savings can be achieved in this way than by importing complete plants. The first co-production agreement came about through China's inability to produce sophisticated equipment under license./3 /1 China Business Review (Washington, D.C.), November-December 1979, p. 20. /2 See US Department of Commerce, Doing Business with China, November 1980. /3 See description by Kang Shien, 5/4/79, in CBR July-August 1979, p.17. - 436 - 3.11 Many of the cooperative production contracts are for large projects, sometimes involving construction of a new production plant. Among the more important contracts already signed are one involving toy manufacturing ($50 million) and one for two petrochemical factories with a company in the Federal Republic of Germany ($21 million total)./1 China has signed preliminary agreements with McDonnell Douglas for joint production of DC-9 Super 80 jets and with Bell Helicopter Textron for production of helicopters./2 Joint Ventures 3.12 A Joint Ventures Law was promulgated on July 14, 1979, to attract direct foreign investment in Chinese enterprises; in addition, a new institu- tion was created to promote foreign investment through joint venture arrange- ments (para. 2.10). In general, the share of foreign investment should be no less than 25%, but no maximum limit for foreign capital is stipulated. In practice, however, the Chinese share of the equity capital has been 50% or more in the ventures already approved. After-tax profits will be shared by the Chinese unit and the foreign firm according to their respective capital shares. Profits may be remitted outside China. The Chairman of the Board of a joint venture must be Chinese, but the position of general manager is rotated between Chinese and foreign candidates, even if the share of foreign capital is less than 50%. Initially, a foreigner is normally appointed, and a Chinese candidate is the deputy manager, so that the Chinese staff can learn modern methods of management. 3.13 On July 26, 1980, the State Council approved two sets of regulations governing joint ventures, one on registration and the other on labor manage- ment. On September 10, 1980, the National People's Congress adopted two income tax laws, one concerning joint ventures and the other individual income; on December 14, 1980, the detailed regulations of these laws were announced by the Ministry of Finance. The law provides that a 30% corporate income tax will be levied on joint ventures by the Government, with a 10% local surtax, resulting in a total of 33%. In addition, an income tax of 10% will be imposed on profits remitted outside China. Favorable tax treatment is provided for reinvestment of profits in China. Joint ventures scheduled to operate for more than 10 years may have their income exempted from taxation in the first profit-making year and are allowed a 50% income tax reduction in the second and third years. Joint ventures engaged in such low-profit operations as farming and forestry or located in remote, underdeveloped areas may be allowed a further 15-30% reduction in income tax for an additional 10 years. The taxes on joint ventures exploiting petroleum, natural gas and other natural resources are to be fixed separately. /1 CBR March-April 1979, pp. 72-73. /2 CBR November-December 1979, p. 21. - 437 - 3.14 The corporate income tax rates and the tax rate on profit remit- tances are lower than those in most developed countries and in many developing countries. However, the regulations do not allow interest payments to be treated as a cost, which seems unusual and unattractive to foreign investors. Also, the 20 year depreciation period allowed for buildings seems too long. 3.15 The individual income tax, with rates varying from 5% to 45%, applies to foreigners who reside in China for more than a year. Since it allows deduction of living expenses of the individual and his or her family, the exemption limit of Y 800 income per month after deductions may not be as low as it appears. Also, the regulations allow the reduction of income tax abroad from the income tax due to the Chinese Government, thereby avoiding double taxation. 3.16 Private foreign investors are particularly concerned about the prob- lem of labor management in a joint venture with a Chinese enterprise. The regulations on labor management have now clarified legal requirements, which may have alleviated the concern of foreign investors. The regulations provide that the workers and staff should all be selected by the joint venture after examination to determine their qualifications, but those recruited must be approved by the labor management department. A labor contract is to be signed jointly by the joint venture and the venture's trade union organization (except in relatively small joint ventures). A joint venture can discharge workers or staff if they fail to meet the job's requirements after training and are not suitable for other work. However, compensation must be given by the enterprise, and the trade union has the right to object and seek an alter- native solution with the enterprise's board of directors. The wage level of the workers and staff in a joint venture are set at 120-150% of the wages of employees of state-owned enterprises in the same trade and locality. Also, a joint venture must pay labor insurance for its Chinese workers and staff (to cover their medical expenses and various government subsidies) in line with the standards prevailing in state-owned enterprises. 3.17 While China is actively seeking foreign investment, it seems to be proceeding cautiously and realistically, giving due consideration to con- straints and priorities. During the current economic readjustment period, utilization of external capital is likely to increase gradually within the limits of China's financial and absorptive capacity. In accepting joint ventures, China is particularly careful about weighing the availability of raw materials, fuel, power, water, transportation and communication facilities, and other urban infrastructure, as well as its construction capacity. 3.18 Following the current readjustment policy, priority is being given to joint ventures that (a) modernize or restructure existing industries using a relatively small amount of capital, but achieving high yields quickly, as well as generating additional foreign exchange, (b) develop energy resources and install energy-saving devices, (c) construct critical infrastructure facilities to remove production bottlenecks, and (d) develop remote, backward - 438 - areas. More specifically, Chinese officials have cited the following as priority areas for foreign investment (not necessarily in order of importance): (a) Agriculture. Development of agriculture, forestry, livestock and marine products, or comprehensive development in remote areas, such as Hainan Island and Xinjiang. (b) Energy. Development of coal mining, petroleum exploration and extraction, nuclear power and other sources of energy. Of immediate importance is using foreign capital for investment in energy-saving devices in existing enterprises. (c) Transportation. Development of railroads and harbor, particularly to remove bottlenecks in transporting coal for both domestic use and export. (d) Urban Development. Improvement of infrastructure facilities in the urban areas, including telecommunications. (e) Renovation of the Textile and Light Industries. Plants and equip- ment to upgrade the quality and increase the variety of products, with emphasis on exports and import-substitution in labor-intensive industries. (f) Machinery and Electronics Industries. Improving the quality and diversifying the product mix of the electronics industry, by accept- ing imported parts and components from foreign investors. For the machinery industry, emphasis will be on introducing new types of energy-conservation devices through research and development. Also, China is eager to develop its capability to manufacture large precision instruments. (g) Building Materials. Development of China's capability to manu- facture alloy steel, synthetic fibers and plastics, synthetic rubber, and other new types of building materials. (h) Tourist Industry. Construction of both large and medium-sized tourist hotels, with either luxurious or standard accommodations, which hitherto has been rather slow because of the backwardness of the building materials and construction industries. 3.19 Up to the end of 1980, 17 joint ventures had been approved,/l most of them in tourism and the light and handicraft industries. These include /1 China Daily News, New York, December 12, 1980, quoting Chinese Economic News, published in Hong Kong. - 439 - hotels (3 in Beijing), an airline food catering service, woolen textiles (in Xinjiang), watch faces, rattan furniture, artificial flowers, elevators and wine. Most of the foreign investors are overseas Chinese (but three are from Japan and one each from France, Switzerland and the USA), acting on their own or with other investors. Many of these joint ventures are investments to expand or modernize existing Chinese plants. The exact amount of foreign capital involved is not known, but is not believed to be very large. 3.20 Four contracts have been signed between the Chinese Petroleum Corporation and some French and Japanese companies for offshore oil explor- ation in the Bo Hai and the South China Sea. This kind of risky undertaking normally has a contract of only one year in order to assure speed and effi- ciency in execution. If oil is discovered, the cost will be borne by China; if not, it will be borne by the foreign company. 3.21 About 70 joint ventures are now being negotiated. Feasibility studies have been completed and initial memoranda signed with US companies for offshore oil exploration, coal mining and precision instruments manu- facturing; with companies in the Federal Republic of Germany for automobile assembly and parts manufacturing, and the electronics industry; with Japanese companies for automobile assembly and light industries; with UK companies for float glass manufacturing; and with France for nuclear power generation. Joint Operations 3.22 A slight variation on a typical joint venture, the joint operation, is found mostly in Guangdong and usually involves small enterprises. The arrangement is halfway between a joint venture and cooperative production: the foreign investor provides equipment but his profit share need not be in proportion to his capital contribution (it is subject to negotiation). Management is in the hands of the Chinese partner, and the foreign capital will usually be repaid within 3-5 years, but certainly within 10 years. The operations' products are mainly for export. Up to the end of 1980, there were reportedly 289 joint operations, with the equipment provided by foreign investors estimated at $500 million. Preferential Treatment in the Special Economic Zones 3.23 Enterprises in Guangdong's three special economic zones (para. 2.15) are granted preferential treatment. Foreign or overseas Chinese investors are being allowed, for the first time, to set up wholly foreign owned enterprises in these zones. Moreover, foreign investors are allowed to run their own enterprises in the special zones, employing foreign personnel for technical and administrative work. In the special zones, land-levelling projects and work to provide various public utilities (water supply, drainage, power, roads, wharves, communications and warehouses) are undertaken by the local authorities. Bank and insurance facilities are also provided. - 440 - 3.24 Other special privileges granted in August 1980 to enterprises in the special zones include the following. (a) Land in the special zones remains the property of China, but favor- able consideration will be given to foreign investors in matters such as land rent, the size of the plot, and the length of tenure. (b) The rate of corporate insurance tax is 15%, which is half the rate in other parts of China. Preferential treatment will be given to enterprises established within two years of the promulgation of these regulations; to enterprises with an investment of $5 mil- lion or more; and to enterprises that use high-level technology or have a relatively long period of capital turnover. Firms that reinvest their profits in the special zones for five years or more may apply for exemption of income tax on profits from such reinvestment. (c) Import duties are waived for machinery, spare parts, raw materials, vehicles, and other means of production for the enterprises in the special zones. Needed consumer goods are subject to the full or a lower import duty, or they may be exempted. Enterprises in the special zones are encouraged to use Chinese-made machinery, raw materials and other goods. Preferential prices will be offered on the basis of China-s export prices for similar commodities, with settlement in foreign exchange. (d) Legitimate after-tax profits of investors, and salaries and other earnings (after paying personal income tax) of foreign workers and staff members may be remitted outside China. On termination of the business, foreign investors may, after clearing their debts, remit their remaining asset funds outside China. (e) Wages and labor protection regulations for local workers differ little from those in the general foreign investment law, except that wages are not fixed as a proportion of wages in similar state enter- prises. 3.25 Products of enterprises in the special zones are to be sold on the international market. If an enterprise wants to sell its products on the domestic market, it must have the approval of the local authority and pay customs duties. 3.26 Shenzhen is the most advanced of the special economic zones. It reportedly has some 60 factories in operation and nearly 200 more under negotiation. Problems in Direct Foreign Investment 3.27 Despite these efforts to attract direct foreign investment, progress has been slow and most investment to date has been by overseas Chinese from Hong Kong in medium-sized and small enterprises, without much significant - 441 - transfer of modern technology. For large Western multinational corporations, investment in China appears to be like charting an unfamiliar sea. The gaps in China's legal structure and unfamiliarity with China's socialist economic system make it difficult for them to envisage how the joint ventures will be operated and to evaluate risks and profitability. Realizing this, the Chinese Government is currently perfecting its laws relating to foreign investment. It is determined to protect the interests of foreign investors and is now negotiating bilateral agreements, including one on political risk insurance, with the USA and the Federal Republic of Germany. 3.28 An important problem China faces concerns the foreign exchange earned by joint ventures. Since a large part of the salaries and wages of foreign workers and staff members, dividends, raw materials and equipment will have to be paid for in foreign exchange, joint venture enterprises must export enough products to pay for these items, and if possible retain a surplus in China. However, export markets are uncertain and foreign investors might not want to export extensively if this encroaches on their existing international markets, preferring instead to sell on the Chinese domestic market. This issue has yet to be resolved, as the Chinese authorities continue to emphasize not only costs and profitability, but also net foreign exchange earnings, when considering the economic feasibility of joint ventures. Summary Appraisal 3.29 It is difficult to judge the efficiency of each of these new ways of conducting foreign trade, since China has had only limited experience with them. Moreover, with the policy priority given to economic readjustment since late 1980, arrangements with large foreign firms for relatively large-scale endeavors under some of these schemes have been discouraged. However, it can already be seen that export processing /1 is perhaps the easiest way of reach- ing agreements with foreign firms, although it does little to bring in significant modern technology. Nevertheless, it can introduce numerous small innovations in designs and packaging, which would have a widespread, favorable impact on China's medium-sized and small industries. Its main benefits would be to earn foreign exchange, utilize existing equipment more fully and increase employment opportunities for surplus labor. The special economic zones, though proceeding rather slowly, would eventually yield similar benefits. Further development of these forms of trade would seem appropriate during the readjustment period and for the medium term. 3.30 Compensation trade is more difficult to arrange, because of the problems involved in pricing the equipment and products. Although China has signed agreements on about 330 compensation trade projects for medium-sized and small industries, there is little information to judge their significance, as well as their costs and benefits. In negotiating compensation trade /1 The present levels of trade are low: receipts of export processing fees are likely to be no more than about $70 million for 1980, and factories operating in Shenzhen perhaps number no more than 80. - 442 - arrangements, Chinese firms should pay more attention to the kinds of equip- ment they obtain and the contracted prices of this equipment and the manufac- tured products. In fixing the future prices of export products, the projected inflation rate in particular should be taken into account. 3.31 At present, only 17 joint ventures have been approved, and the number of cooperative production contracts is perhaps even lower. Joint production and joint venture arrangements are complex and difficult to reach agreement on. However, they appear to be suitable for cooperating with large foreign corporations in transferring modern technology to China. After the period of economic readjustment is over, China will perhaps be more interested in these kinds of foreign trade and investment schemes. In the long-term, they can become more significant in both quality and quantity terms, although it will take some time to overcome the initial lack of understanding between the Chinese and foreign firms. While all these schemes would help China gain access to foreign markets, they will be no substitute in the long run for China establishing its own marketing network. 4. PLANNING AND PRICING IN FOREIGN TRADE AND EXCHANGE 4.01 The planning of foreign trade is an essential part of China's cen- tral economic planning, which was initially established in the 1950s. Since then the most significant changes in foreign trade management (paras. 2.08- 2.15) were made after 1978, following the rapid increase in China's trade with market economy countries. However, it is not yet clear to what extent China would resort to foreign trade as a means of economic development or to what extent China would blend planning with price mechanisms in conducting foreign trade. Foreign Trade and Foreign Exchange Plans 4.02 The framework of foreign trade and foreign exchange planning has remained virtually unchanged since the mid-1950s. The trade and exchange plans are essential parts of the national economic plans, and their prepara- tion is guided by the overall objectives of the latter. The current practice in foreign trade and exchange planning is first to promote exports, with due consideration of domestic supplies of essential goods, then to determine the level of imports based on expected foreign exchange earnings, thereby maintaining the current account in balance. 4.03 The foreign exchange plan is drawn up by the State General Administration for Foreign Exchange Control and incorporates the foreign trade plan drawn up by the MOFT, both in conjunction with the SPC. While the two former agencies are primarily responsible for preparing well-balanced plans, the SPC is concerned with the overall balance between the external sector and other sectors of the economy (production, capital construction, people's living requirements, commodity distribution, public services, etc.). The planning process is the same for both the annual plans and the five-year plans. - 443 - 4.04 Preparation of the annual foreign trade plans begins in June-July of the preceding year. At that time, all the central ministries and other agencies in charge of production and supply, all foreign trade corporations, and foreign trade bureaus in the provinces, municipalities and autonomous regions are requested to report to the SPC and the MOFT their estimates of goods available for export and their import requirements for the coming year. In working out their trade plans, the local trade bureaus coordinate with the local planning commissions, which are concerned with the balance between all sectors of the local economy. These plans, along with those of the central ministries, are put together by the MOFT and the SPC and submitted (as a part of the annual national economic plan) to the State Council for consideration. At the national foreign trade planning conference in September-October, the MOFT and the SPC see what import requirements of one locality can be met by the proposed exports from another, with the aim of reducing total potential imports and exports. The revised foreign trade plan is then submitted to the State Council by the years end for approval. 4.05 Import Planning. The purpose of import planning is to find out import requirements by commodities, then to balance these with what can be made available domestically in order to determine net import requirements. For instance, the Steel Ministry would provide steel output targets, which would then be matched with the demand targets provided by the State Bureau of Materials Allocation based on data on the steel requirements of steel-using ministries and agencies. The balance between the requirements and production targets are presented to the import departments of the SPC and MOFT. Simi- larly, the import requirements for machinery and equipment are determined by the capital construction plan and production programs agreed among the SPC, the State Capital Construction Commission and State Economic Commission, and approved by the State Council for inclusion in the national plan. All import requirements for means of production are in turn balanced with other import requirements and expected foreign exchange receipts, and adjustments are made by the SPC and MOFT. For instance, a reduction is normally made in steel import requirements. Priorities are established regarding the timing of machinery and equipment imports, so that negotiations with foreign suppliers begin first for items with a higher priority. 4.06 Imports of consumer goods have to be coordinated with domestic supplies. The Ministry of Commerce estimates national purchasing power (sales) of consumer goods and then coordinates this with estimates of goods available. For consumer goods likely to be in short supply, decisions have to be made either to increase production or to import. The principle is to avoid importing finished consumer goods if possible, by importing raw materials and manufacturing consumer goods (e.g. importing cotton to make cloth). The import plan for consumer goods and raw materials for light industries is finally decided after consultation among the SPC, the MOFT, the Commerce Ministry and other relevant ministries. - 444 - 4.07 The composition of imports is basically determined by the overall objectives and direction of national policy. Under the First and Second Five-Year Plans (1953-62), the emphasis was on basic capital construction, so imports of the means of production (i.e. machinery, equipment and raw materials for production) accounted for the bulk of imports (about 80-90%); imports of consumer goods were small. During the subsequent readjustment period, imports of consumer goods such as foodgrains, cotton, edible oil and sugar increased more rapidly than imports of the means of production. In the recent past, the relative trends were again reversed; but since 1979, with the emphasis on economic readjustment, imports of consumer goods have again tended to increase more rapidly. 4.08 Export Planning. The main determinants of export items are produc- tion capacity, demand and supply conditions, and prices in the foreign market. The preliminary compilation of an export plan is the responsibility of the MOFT, in coordination with the SPC; the MOFT also consults ministries in charge of production and the Ministry of Commerce regarding domestic demand. In the past, the emphasis was on satisfying domestic demand, but now an effort is being made to allocate some output for export if foreign markets are favorable. From the exportable goods targets, an export plan is formulated, which, as a part of the foreign trade plan, is further balanced and coordinated with total import requirements at the annual foreign trade planning conference. The current guiding principles are not to make export targets too high, and to allow some flexibility for unexpected adjustments. 4.09 The foreign trade plan is in turn incorporated into the foreign exchange plan./l For nonmerchandise transactions in the foreign exchange plan, the Ministry of Foreign Economic Relations prepares the part dealing with external assistance and Chinese loans to Third World countries. The foreign exchange receipts and outlays of other government departments are pre- pared by the Ministry of Finance. The General Administration for Foreign Exchange Control (GAFEC) draws up the part of the plan covering local and provincial nontrade transactions, receipts from overseas Chinese, tourist receipts (in consultation with the Tourism Bureau), and individual receipts. The plan, drawn up in dollars, includes all transactions, even those under bilateral agreements. The overall foreign exchange plan is coordinated and balanced by the GAFEC. The SPC reviews the plan and reconciles it with the other plans; it is then submitted to the State Council for approval and thereafter sent back to the localities and ministries for implementation. The GAFEC is responsible for supervising the implementation of the foreign ex- change plan. At the end of each quarter, the SPC reviews the implementation of the plan and determines whether corrections are necessary. 4.10 Since 1979, some flexibility in foreign exchange planning has been allowed by the introduction of a foreign exchange retention system. This system encourages local authorities and trade corporations not under the MOFT /1 See IMF, The People's Republic of China, Recent Economic Development (January 1981), Appendix VIII. - 445 - to earn more foreign exchange, by allowing them to retain a proportion of the foreign exchange earned in their jurisdictions. For merchandise exports by the local authorities, 40% of earnings above the base period (1978) amount may be retained. However, if an export commodity produced by local enterprises comes under the jurisdiction of the FTCs, the local authorities may only retain 20%. In both cases, the enterprise concerned is entitled to 15% of the retained foreign exchange. For nontrade items, the proportion of foreign exchange earnings that may be retained by the local authorities varies: 20% for harbor dues, 30% for overseas Chinese remittances (100% if these are used to purchase bricks and tiles for housing construction), and 40% for tourism receipts. The local authorities in turn allocate retained foreign exchange earnings to their subordinate departments, tourist hotels and enterprises. 4.11 Trade corporations not under the direct jurisdiction of the MOFT retain a proportion of their foreign exchange receipts that varies from 30% to 100% (depending on the commodity) of earnings above the base period (1978) amount. The percentage is lower for items that sell well abroad, e.g. 30% for lathes, but higher if foreign markets are relatively unfavorable, e.g. 100% for complete plants. Pricing in Foreign Trade and Exchange 4.12 When economic planning and management are centralized, implementa- tion of the foreign trade plan is almost entirely in the hands of the FTCs and their branches. The corporations are "essentially agents to which the rele- vant ministries and their subordinate organs and enterprises entrust tasks of buying and selling specific quantities of goods at the best prices obtainable and in accordance with the economic plans of the state."/l This is particu- larly true of implementation of the import plans, which involves almost entirely negotiations with foreign sellers and purchases from abroad of either complete plants, equipment, and high-technology goods, or foodgrains and raw materials in bulk. To implement the export plan, exports manufactured by enterprises are centralized by the national trade corporations for pro- curement, negotiations and delivery. However, in the export of agricultural commodities, which are supplied by numerous small collective units, local trade organizations have played a role. 4.13 Despite the recent decentralization of foreign trade management, all agencies, in implementing the foreign trade plan, have to follow the prices fixed by the state. The State Price Bureau under the State Council fixes prices for both domestic and foreign goods. To facilitate this task and accounting in foreign trade, the Price Bureau trusts agencies engaged in foreign trade to price import and export goods in accordance with a set of uniform criteria. The basic principle is that domestic prices are isolated from world market prices for the dual purpose of maintaining domestic price stability and of protecting domestic industries. /1 Audrey Donnithorne, China's Economic System (New York, Praeger, 1967), pp. 326-7. - 446 - 4.14 The domestic prices of imported goods are generally made consistent with prices of similar domestically produced goods. Uniform prices for indus- trial goods produced by state enterprises are fixed by the Price Bureau accor- ding to ex-factory prices, which include the cost of production, profits and the consolidated industrial or commercial tax. Income tax is added for goods produced by collective enterprises. These price data are transmitted to the foreign trade agencies as a base for fixing the price at which imported goods are sold to the purchasing agencies. If uniform ex-factory prices do not exist, but there are announced wholesale prices /1 for similar domestically produced goods in the major trading ports, the prices of imported goods are fixed accordingly. 4.15 Similar methods apply for pricing imported agricultural products. If they exist, national supply prices are applied for purchases of similar imported products (such as foodgrains, edible oil and fats); if not, the wholesale prices in the port of arrival are used. Any adjustments required must be referred to the State Price Bureau for examination and approval. 4.16 The prices of imported goods may be adjusted (upwards or downwards) to reflect differentials in quality and specifications, after negotiation between the MOFT and the agencies that ordered the goods. The State Price Bureau will mediate in case of failure to reach agreement. 4.17 While about 80% of the prices of imported goods can be determined using these methods, some cannot, for instance, if the imported goods are not produced domestically or are produced infrequently (e.g. a whole set of equip- ment, electrical machinery, etc.). In these cases, prices are fixed according to the c.i.f. value at the port of arrival (converted at the prevailing official exchange rate), plus the import duty, consolidated industrial and commercial tax, and a fee charged by the foreign trade agency. For some time, import duty and profits on foreign trade were combined, but since 1978 they have again been separated./2 Customs duties are collected by the MOFT and the receipts, which are forwarded to the Ministry of Finance, are not treated as trade profits. /1 These prices are fixed by the Ministry of Commerce and the State Price Bureau. /2 In the early years after liberation, the customs administration was inde- pendent, but later it was merged with the MOFT. Customs revenues were therefore counted as part of MOFT's revenues in calculating profits and losses in import trade. - 447 - 4.18 Import duties under the general tariff /1 fall into 25 categories, ranging from 7.5% to 400%. Duties under the minimum tariff fall into 21 cate- gories, ranging from 5% to 200%. In general, tariff rates are relatively low on imports of the means of production (raw materials and capital goods), but high on consumer goods. The tariff rates for most consumer goods range from 15% to 80% ad valorem with the top rates on high-class consumer goods. Import duties only affect resale prices for the 20% of imports for which similar domestically produced goods do not exist; for the remaining imports, the duty due only affects the distribution between MOFT's trading profits and receipts collected for the Ministry of Finance. If imported machinery, equipment and whole plants belong to the former category, the rate of import duty, as well as the fees charged by the MOFT, influences their domestic price and to some extent also the demand for these imports. Only some imports for manufacturers in the special economic zones are exempt from duty (para. 3.24). In 1978, the average import duty, calculated as a percentage of total custom receipts to total import value, was about 15%./2 4.19 Trade agencies procure export commodities at the ex-factory price for domestic procurement (para. 4.14). The selling prices abroad are, how- ever, determined by the export market conditions. This pricing policy, together with the foreign trade plan and the given official exchange rate, has resulted in a rather complicated picture of profits and losses in foreign trade. The lack of data makes it difficult to determine the exact financial situation, or assess the real costs and benefits. The Chinese price system generally keeps agricultural prices and the prices of other daily necessities (such as coal) low vis-a-vis industrial prices, which should help maintain low and stable living costs on the one hand, while accelerating industrialization on the other. Moreover, high industrial prices result in high profit margins, which are an important source of government revenue. 4.20 This kind of price differential has become more apparent in compari- son with world market prices through foreign trade. Thus, for example, impor- ted wheat was bought at $200 a ton in late 1980; adding $60 for transportation costs, it would cost about Y 390 a ton at the official exchange rate of Y 1.5 = $1.0. As domestically produced wheat was priced at Y 300 a ton, the state trading corporation was losing Y 90 a ton, or about 23%. For the same reason, Chinese exported foodstuffs and other agricultural goods were sold at a significant premium in Hong Kong. The most striking example of this is rice: the price of Chinese rice exported at the official exchange rate was about /1 Except for imports into Xizang (Tibet), China applies a two-column import tariff with a general rate and a minimum rate. The minimum rate is applied to goods from countries with which China has concluded reciprocal commercial treaties. The general rate applies to all other countries. /2 IMF, ibid. - 448 - 400% higher than the price in Hong Kong./1 Similarly, bituminous coal of good quality was selling on the international market at $45-50 a ton, while the domestic price of this coal was only slightly over $20 at the official exchange rate before the end of 1980. Thus, in general, the Chinese trading corporations made considerable profits on exports of agricultural and mining output (including petroleum). However, low prices would not necessarily increase the export volume, because the trade corporations cannot pay higher procurement prices than those paid by the domestic purchasing agencies, and the export volume is subject to decisions made by the planners. Moreover, the low prices for most food items and agricultural raw materials, which have been maintained for a long period, have discouraged production, and exports compete with domestic consumption./2 Agricultural prices were raised in 1978, but the price differentials between agricultural and industrial commodities still seem fairly large by international standards. 4.21 The prices of manufactured goods in China appeared to be generally higher than world market prices at the official exchange rate before the end of 1980. For instance, a domestically made 12" black and white TV set was sold for Y 400 in November 1980, but the cost of an imported set was Y 300 at the prevailing official exchange rate. The price policy would require the domestic market price of the latter to be at least Y 400, despite its lower cost; moreover, since it is of better quality and has more features, its price was actually fixed at Y 500. The state trading corporations therefore made considerable profits (after tariffs) on this kind of import. This pricing method does, however, make imported goods noncompetitive and therefore pro- vides no incentive for cost reductions in domestic production. On the other hand, Chinese manufactured goods competing on foreign markets were mostly sold at much less than the domestic price at the official exchange rate before the end of 1980. For instance, Chinese-made electric fans, portable radios, watches, alarm clocks, nylon pants, and shirts were selling in Hong Kong at below 45% of the prices in Guangzhou, and cameras, pens, blankets, pencils, basketballs, thermos bottles, bicycles, and sewing machines at 50-90%. Losses on these exports are borne by China's trading corporations, which have to export these goods to earn badly needed foreign exchange and to meet export plan targets. The production units are unaffected by these losses and continue to produce these goods without pressure to reduce costs. 4.22 In summary, imports are purchased at world market prices and sold at the prevailing domestic price, while exports are purchased at the domestic price and sold at world market prices. At the exchange rate prevailing before the end of 1980, domestic prices on average exceeded both import prices and export prices (all expressed in local currency). As a result, most imports were making an accounting profit, while most exports were making an accounting loss; these differences are evened out within the whole state trading system. /1 Jung-Chao Liu, "A Note on China's Pricing Policies" (Mimeo), March 19, 1980. /2 Because of shortages, some agricultural products such as rice, wheat, and edible oil have been rationed for a long time. - 449 - Profits/Losses in Foreign Trade and Exchange Conversion Ratios 4.23 Since both exports and imports of a category of commodities are undertaken by one trading corporation (each of which is an independent accoun- ting unit), losses in export trade can be offset by profits in import trade. The FTC's net profits (or losses) are aggregated in the MOFT account, which in turn is submitted to the Ministry of Finance for incorporation into the national budget./l The MOFT attempts to keep down exports of commodities that suffer losses, but expand exports of those making profits. As a rule, an appropriate amount (subject to negotiation between the MOFT and the Ministry of Finance) of net profit from foreign trade should be realized in terms of local currency. So far the MOFT has generally maintained a surplus, though this had apparently dwindled in the second half of 1980. 4.24 One way of looking at the accounting profit or loss, for instance in exports, is to compare the amount of local currency needed to procure domestically the amount of an export commodity that can be sold for $1.00 on the world market. Except for its exports of oil, coal and most minerals, and agricultural and agricultural sideline products, China can scarcely obtain $1.00 by exporting domestic goods worth Y 1.5. Even for textiles and garments (except those made of silk), the domestic procurement cost of $1.00 of export earnings would be more than Y 1.5. For other light manufactured goods, the domestic cost would be even higher. The domestic cost of most machinery items was about Y 2.5-3.0 per dollar, and for electronics components, Y 5-6. At the autumn 1980 trade fair in Guangzhou, contracts for machinery sales got on average only Y 4 for a dollar. The trade corporations of manufactured goods generally consider Y 2.6 for a dollar an acceptable level. 4.25 The exchange conversion ratios for manufactured exports can be improved if the domestic unit cost of production can be reduced, or if the goods are exempted from the consolidated industrial and commercial tax (as they are in most developing countries). The exchange conversion ratios can also be improved by raising product quality and design standards, provided the additional cost incurred is smaller than the additional revenue obtained. However, it will take some time to achieve cost reductions and product improvements under existing industrial conditions. Any tax exemptions would reduce government revenues, but they would also reduce export losses, which currently detract from import profits. The net effects on the national budget might not be very large. 4.26 Profits and losses in state trading could be considered just as accounting conventions. Since the whole trading system is making a reasonable net profit, and all exports and imports are planned, accounting profits and losses for individual commodities, or even for individual FTCs, have no real /1 Profits and losses on foreign trade conducted by trade corporations and other agencies not under the MOFT's jurisdiction are incorporated in the accounts of their respective supervising ministries, and then in the national budget. - 450 - economic significance. This may have been true before the decentralization of foreign trade in 1978, but now other agencies involved in direct trading (production ministries, provincial and municipal governments, and individual enterprises) are responsible for their own trade profits and losses. Moreover, profit has increasingly become an important criterion in judging performance and entitlement to bonuses. Since some agencies engage mostly in exporting and others mostly in importing, the former would suffer losses and the latter large profits under the official exchange rate prevailing before the end of 1980; neither could be attributed to performance. Furthermore, under these conditions, imports appear to have been encouraged too much, particularly in machinery, equipment and whole plant (which China does not produce), while exports were discouraged. These problems will become increasingly important as more enterprises are allowed to conduct foreign trade directly. 4.27 These considerations appear to underly the recent change in the so-called "internal settlement rate" for foreign trade and trade-related transactions (from about Y 1.5 = $1.0 to Y 2.8 = $1.0) and the introduction of a new experimental foreign exchange trading system. This rate was first introduced on an experimental basis at the start of 1980 for selected enterprises. Since January 1, 1981, the new rate, which is pegged to the dollar, has applied to all enterprises and corporations engaged in foreign trade, as well as to receipts and expenditure in foreign exchange for trade-related invisible transactions, such as shipping and insurance. The official exchange rate, which is still pegged to the value of a basket of currencies, remains in effect for all other invisible transactions and for all settlements denominated in renminbi with nonresidents. Also, since November 1980, the Bank of China has established a new experimental trading system for foreign exchange in a few areas, such as Beijing, Guangdong, Hebei, Shanghai, and Tianjin. Enterprises holding foreign exchange earned through the system of retention quotas may sell this foreign exchange (through the Bank of China) to other enterprises that are allowed to spend foreign exchange. Planning for External Borrowing /1 4.28 In recent years, China has gradually shifted from a policy of "no debt" to a policy of accepting foreign borrowing to foster modernization. External borrowing is also planned. All government departments that wish to borrow abroad must prepare a plan showing the amount of foreign exchange needed, how much of this will be earned and how much borrowed from abroad, and the kinds of imports the loan is intended to finance. All these plans are submitted to the SPC, which reviews them in cooperation with the Import-Export Commission and the Foreign Investment Control Commission. If the imports are for new capital construction the plans are also reviewed by the State Construction Commission. /1 See IMF, ibid. - 451 - 4.29 Approval of foreign loans is based on consideration of the need for foreign capital, the ability of the borrower to repay, and China's overall debt-service ratio. Loans for vital projects or projects that have a rapid rate of return and good ability to earn foreign exchange are given priority approval. Most loans have been made through the Bank of China or - for some loans to provinces or enterprises that can repay the loan themselves with Bank of China guarantees. Bodies other than the Bank of China require the approval of the State General Administration for Foreign Exchange Control before they can receive loans from abroad. In the future, however, official borrowing from multilateral agencies, such as the World Bank and the IMF, as well as from foreign government agencies, will tend to assume a greater proportion. 4.30 The policy of accepting foreign capital should add a new dimension to foreign exchange planning, because inclusion of imports financed by foreign capital inflows in total imports would create an import surplus in the current account. This would go against the traditional principle of keeping the cur- rent account in balance. To make foreign exchange planning consistent, the balance of payments current and capital accounts should be planned jointly, to work out the implications of their interrelationships. To obtain a meaningful comprehensive picture, this will become even more necessary once China starts to service its foreign debt. 5. BALANCE OF PAYMENTS, EXPORT PROSPECTS AND EXTERNAL BORROWING /1 Recent Balance of Payments Developments 5.01 Different foreign trade data were provided by the MOFT and the Bank of China. The IMF has adjusted the Bank of China data to include exports not settled through the Bank of China, foreign aid exports not included in the MOFT data, etc. On the import side, MOFT data are smaller than the Bank of China data, because the latter also include imports by agencies not under the MOFT. Thus the Bank of China's import figures are more accurate, though to them must be added an estimate for imports under compensation trade arrange- ments and for imports financed by official loans from Belgium and Japan. 5.02 These unofficial estimates indicate that China's trade deficits are larger than those shown by the MOFT's trade statistics, but they still reflect the same trend over recent years. The merchandise trade balance shifted from a small surplus of $0.4 billion in 1977 to deficits of $1.7 billion in 1978 and $3.3 billion in 1979 (Table 5.1), with imports expanding more rapidly than exports as an ambitious modernization program was implemented and new foreign trade and investment measures introduced. The effects of the readjustment program, introduced in mid-1979 to reduce the level of investment, have begun /1 Further discussion of trade prospects and foreign borrowing policy options is contained in Chapter 6 of the Main Report. - 452 - to be felt only in 1980. With imports growing more slowly (at 21%) than exports (at 28%) - both estimated on an adjusted payments basis - the trade deficit was reduced by almost 7% to $3.1 billion in 1980. This trend is likely to continue in the short term. Table 5.1: UNOFFICIAL BALANCE OF PAYMENTS ESTIMATES, CURRENT ACCOUNT, 1977-80 /a ($ million) 1980 1977 1978 1979 estimate Exports 8,050 9,745 13,987 17,900 Imports -7,627 -11,399 -17,266 -20,968 Trade Balance 423 -1)654 -3,279 -3$068 Transportation & Insurance, net 255 344 622 777 Travel receipts 116 241 413 457 Bank interest & charges, net 65 70 196 287 Other services, net -375 24 -106 -322 Service Balance 61 679 1,125 1 199 Overseas remittances 497 597 656 680 Foreign grants-in-aid -70 -69 -30 - Transfers, Net 427 528 626 680 Current Account Balance 911 -447 -1,528 1,189 /a An official balance of payments table for China is being prepared by the Bank of China and may be available in mid-1981. The very tentative esti- mates given in this table were prepared by IMF staff and will be super- seded by the official figures when they become available. 5.03 China has consistently had a surplus on its services account, because of the large receipts from shipping and tourism. China's policy has been to expand its own merchant fleet while encouraging the carriage of freight on Chinese ships. During the past several years, the Chinese merchant fleet has grown faster than that of any other country, and the share of China's trade handled by its own fleet is reportedly 70%, the highest percentage in the world./l Equally impressive is the rapid growth in receipts /1 US Department of Commerce, International Trade Administration, "Prospects for PRC Hard Currency Trade Through 1985: An Update," by Damian T. Gullo (July 1980), p. 8. - 453 - from harbor dues, insurance, etc., although the amount of insurance receipts is very small. During 1978-80, receipts from transportation and insurance have grown at an average annual rate of 43%. Tourism receipts have also grown rapidly, following the opening of the country to foreign tourists in 1978;/1 the amount doubled in 1978 and increased by over 70% in 1979. However, because of the shortage of hotel accommodation in Beijing and Shanghai, the growth has slowed down considerably in 1980./2 The number of Chinese residents travelling and studying abroad has also increased, as reflected in the "other services" figures; this expenditure was, however, much smaller than tourism receipts. Both interest receipts and payments have increased rapidly in recent years. Apart from the factor of higher interest rates, it appears that on the receipts side, the business of Bank of China branches and Chinese-owned banks abroad has been expanding; on the payments side, China has been using short-term bank borrowing to finance its balance of payments deficits. For the service account as a whole, China's surplus has increased rapidly in recent years and is estimated at $1.2 billion for 1980. 5.04 A traditional major factor in China's balance of payments has been remittances from overseas Chinese. Following the adoption of a more favorable attitude towards overseas Chinese and renewal of connections between rela- tives, remittances have increased impressively in recent years. However, the rate of increase appears to have slowed down in 1980 and reached a saturation point. But remittances, estimated at $680 million in 1980, are still quite substantial. In addition, China's aid (in the form of grants) to Third World countries (about $70 million in 1977/78) was less in 1980 than in earlier years. 5.05 Surpluses in invisibles have helped China to offset its trade deficits in the last three years. Thus, the deficit in the current account amounted to $0.5 billion in 1978, $1.5 billion in 1979 and $1.2 billion in 1980. 5.06 Foreign aid loans by China dominated the capital account from the mid-1960s until recently. The aid loans were extended to friendly Third World countries, with long terms and low (or no) interest. During 1961-69, China managed to extend $1.6 billion in external aid (grants and low or no interest loans) to other developing countries. The amount increased to $5.8 billion during 1970-77, before it began to level off./3 In 1977 and 1978, foreign aid loans amounted to $1.06 million and $0.90 billion, respectively, but declined to $253 million in 1980. /1 At present, 122 cities are open to foreign tourists, of which 40 are popu- lar tourist spots. /2 A recent press report indicated that tourism receipts increased by about 31% to $617 million in 1980, which is much higher than the estimate in Table 5.1. /3 See OECD, The Aid Program of China (Paris, 1979). - 454 - 5.07 Since the mid-1970s, China has used short-term borrowing and deferred import payments to finance its balance of payments deficits, but only in 1979 did it begin to accept medium- and long-term loans. China used a rather large amount of commercial bank Eurodollar credit in 1979 ($1.3 bil- lion), mainly in the form of deposits with the Bank of China. Also, China began to accept imported equipment to be paid for by goods produced in the future; this kind of credit was estimated at about $1.1 billion in 1979. The large amount of foreign borrowing, together with sharply increased export earnings, financed an unusually large amount of machinery, equipment and whole plant imports in 1979. In 1980, the readjustment program slowed down capital goods imports and reduced commercial bank borrowing. However, China began to accept bilateral official loans (from Belgium and Japan) and export credit guaranteed by the exporting countries- export credit agencies, although the amount disbursed was not very large (about $400 million). On the other hand, the repayments of short-term debt and deferred import payments were quite large ($2 billion). Thus, 1980 ended with a decline of about $560 million in international reserves (Table 5.2). Export Prospects 5.08 China-s policy on external trade and borrowing has changed funda- mentally over recent years, so past long-term trends provide little guidance for the future and projections are very tentative. Even trends over the past four to five years cannot be relied upon in making projections, because they reflect considerably the short-term recovery from the recent political turmoil. These comments apply especially to imports, the future level of which will depend largely on China's ability to earn foreign exchange and accept external financing, which in turn is limited by the country's debt servicing capacity. The recent high rate of increase in exports may not continue, even with the new policy of encouraging exports, because of supply constraints and market constraints, which may limit the expansion of many Chinese manufactured exports. However, the current economic readjustment and reform of the economic system will tend to build a sound base for a sustained economic growth over the long term, and exports will have a better chance of accelerating after the mid-1980s. Moreover, China has traditionally had a surplus in its invisible account, and the prospects here are quite promising, particularly for transport and tourism receipts. Increased foreign earnings could support substantial expansion of imports after the mid-1980s. - 455 - Table 5.2: UNOFFICIAL BALANCE OF PAYMENTS ESTIMATES, CAPITAL ACCOUNT, 1977-80 Ia ($ million) 1977 1978 1979 1980 estimate Current account balance 911 477 -13528 -1 189 Long-Term Capital -990 -830 1,919 23110 Export credit .. .. 36 133 Eurocurrency borrowing .. .. 1,330 360 Official loans .. - 259 Credit under compensation trade .. .. 1,097 1,256 Foreign aid: Loans -1,600 -900 -613 - Repayment 70 70 69 70 Short-Term Capital -82 -512 415 -1)964 Short-term bank borrowing, net -524 135 630 -1,362 Unrepatriated export earnings, etc. 442 -233 -535 20 Increase in deferred import payments n.a. -35 447 -650 Changes in bilateral payments agreements, assets n.a. -379 -127 28 Errors and omissions 670 1,004 -133 340 Total Capital Account -402 -338 2,201 486 Allocations of SDRs - - - 146 Changes in reserves (- indicates increase) -509 785 -673 557 /a An official balance of payments table for China is being prepared by the Bank of China and may be available in mid-1981. The very tentative esti- mates given in this table were prepared by IMF staff and will be super- seded by the official figures when they become available. 5.09 Merchandise Exports. On the basis of the MOFT's 1979 data, about 33% of China's merchandise exports were agricultural (raw and processed) commodities, 21% minerals, including mineral fuels, and 46% manufactured goods (including a small amount of nonferrous metals)./l The share of mineral fuels probably rose to more than one quarter in 1980, however, as a result of the sharp rise in the world price of oil. The future volume of agricultural exports will depend on how much surplus the economy can realize after allowing /1 See Table 1.7. An estimated 2% of mineral raw materials are deducted from "Nonedible raw materials" and included in mineral exports ("mineral fuels, lubricants and related materials.") - 456 - for domestic consumption, which is rising considerably under the current economic policy. The supply constraint is somewhat mitigated by the recent policy of emphasizing agricultural production increases. The greater freedom given to the production teams in deciding what to plant, as well as to the farmer in using his private plot and marketing his surplus, is particularly conducive to increases in a wide range of farm products. During 1976-79, the annual average rate of increase in volume terms was 5.3% for frozen pork; 6-10% for rice, peanut kernels, bristles, peanut oil and fruits; 11-15% for rabbit hair, filature silk, fresh eggs, canned fruits, frozen rabbit meat and soybeans; and 21-28% for tea, camel hair and goat skins. Some minor agricultural export items either increased less rapidly or declined slightly. Food exports go mostly to Hong Kong and Japan. If China continues to follow its new agricultural policy, exports of such agricultural products could increase at a reasonable rate. However, domestic consumption tends to increase along with increases in incomes; moreover, the land scarcity means that increases in exportable surpluses over the long term will have to come from increases in agricultural productivity, which may be difficult to achieve. 5.10 Crude oil is China's largest single export item. In addition, China also exports oil products, which together with crude oil exports ($1.75 bil- lion in 1979) were estimated at $2.45 billion,/1 or 18.6% of total exports in 1979. A sharp rise in world prices caused China's earnings from crude oil to nearly double in the first nine months of 1980 compared to the same months of 1979 (Table 1.8 above). However, China's output of crude oil declined in 1980 for the first time since 1967, although only by about 0.2%. This declining trend is likely to continue, since oil production from existing fields, which has remained virtually unchanged since 1978, appears to have peaked (see Annex E). 5.11 In September 1980, China notified Japan of its decision to cut crude oil supplies in 1981 and 1982 to 8.3 million tons a year, down from the targeted 9.5 and 15.0 million tons, respectively, stipulated in the long-term trade agreement. Prospects for continued exports of oil in the 1980s will depend largely on success in conserving energy and in switching from oil to coal, as well as in enhanced recovery from existing fields and in development of new fields. (For a fuller discussion of these issues, see Chapter 6 of the Main Report.) 5.12 China has abundant coal reserves and coal production is quite high (600 million tons in 1980). The coal is largely consumed domestically, with less than 1% of the total exported (in 1979, coal exports were 4.6 million tons and accounted for 1.5% of total exports). Coal production increased only moderately in 1979 (2.8%) and decreased in 1980 by about 2.4%, because of the difficulty of working some seams in the large mines and many small pits becoming inefficient after excessive mining in previous years, when ambitious annual output targets were emphasized. Coal exports have nonetheless increased quite rapidly, because the relatively small amount of exports scarcely affects domestic consumption, the export price is very favorable /1 Exports of "mineral fuels, lubricants and related materials" minus coal exports. - 457 - compared with the domestic price, and foreign exchange earnings are highly desirable. During 1976-79, the volume of coal exports increased at 26.5% a year on the average. During the first nine months of 1980, the value of coal exports increased by 62%, as compared with the corresponding period of 1979, reflecting the doubling in value of coal exports to Japan. 5.13 The principal buyers of China's coal have traditionally been the East European countries. However, in 1978, Japan emerged as an important customer, buying about one fourth of China's total coal exports. Under a long-term bilateral trade agreement, coal exports to Japan are scheduled to reach 2.5-2.7 million tons in 1981 and 3.5-3.7 million tons in 1982 (the latter would more than double exports in 1980). Exports for the following eight years are to be determined through negotiations in 1981. Recently, China assured Japan that coal supplied to Japan in 1981/82 will meet the agreed targets, although coal production is encountering difficulties. Important constraints for coal exports are rail transport and harbor facilities, which are critical for moving high quality coal out of Shanxi, Shandong and Anhui. In the medium term, the rehabilitation of existing coal mines and the development of larger new mines (some under arrangements with the Japanese Export-Import Bank) will likely increase output significantly. However, the switch from oil to coal will increase domestic consumption. Over the longer term, the average annual rate of growth of coal exports can be expected to remain fairly high, although perhaps somewhat below the rate of the recent past, provided the plan to develop coal mining is implemented and transportation problems are solved. With this rate of increase China will probably not encounter market constraints. 5.14 Although China is believed to have large reserves of nonferrous metals, exports of mineral products other than petroleum and coal accounted for only 2-3% of total merchandise exports in 1979. By far the most valuable is tungsten, but its export volume has increased very slowly. The volume of antimony exports has increased rapidly, but their value is still very small. Tin exports have declined. Other nonferrous metals believed to exist in large quantities are manganese, mercury and molybdenum. Deposits of aluminum ores, copper, lead and zinc are also considered extensive. To develop an export surplus in these mineral products, China must not only build up its technical capability to construct new mines, but also establish the necessary infrastructure, such as power stations, workers' accommodations and transport facilities to carry the products to the ports. In view of the shortages of capital and technical manpower, development of the nonferrous metals industry will have to rely heavily on foreign capital and technology. China hopes that mining development can be achieved by using imported modern mining equipment or through compensation trade arrangements with foreign firms. Large-scale production of ores and concentrates is at least five years away, so exports of nonferrous metals can only be expected to increase appreciably after 1985. 5.15 Manufactured exports /1 comprise textiles and clothing (estimated at 24% of total exports), light industrial goods (11%), and heavy and chemical /1 See also Annex D, Chapter 5, for a fuller discussion of issues relating to manufactured exports. - 458 - products (11%). Developed countries purchase only about 35% of China's textile and clothing exports, and less than half of those in every other category except leather goods. Exports that go almost entirely to developing countries (including goods re-exported through Hong Kong) include fabricated metal products, iron and steel, machinery, electrical products and paper. Exporting manufactured goods other than textile products to Japan, North America and Western Europe is just beginning. 5.16 The current economic readjustment policy emphasizes the expansion of agriculture and light industry as well as exports. Thus, textiles, clothing and other light industrial exports receive special attention. Firms manu- facturing for export are given priority in the supply of raw materials and power. Incentives are given to firms processing imported materials or assembling imported components for export, as well as to those with compensa- tion trade arrangements and those established in the special economic zones. 5.17 Import quotas are the most serious obstacle to expanding China-s exports of textiles and clothing to developed countries. On September 17, 1980, a bilateral agreement was signed regulating China's exports of textile products (cotton, man-made fiber and wool) to the USA. China has accepted annual quotas for 1981-82 on six major categories of clothing./l If the USA believes that exports of other textile products from China are contributing to actual or threatened "market disruptions," it may request consultations with a view to negotiating a quota. If no agreement is reached, it may impose a quota based on import levels in the immediate past, but this quota will grow by 20% in the following year (except for wool products, where the growth rate will be 6%). China's earlier agreement with the European Economic Community is somewhat more restrictive and includes quotas that increase only slowly for cotton yarn and cotton and man-made fabric, as well as major items of clothing. Other developed countries (such as Canada and Sweden) also impose quotas on China-s goods; Japan, however, has thus far resisted an import quota system. Overall, textile quotas should allow some room for expansion of China's exports of textiles and clothing, even under the existing arrangements. However, to raise the unit value of its textile exports, China needs to improve the quality of its dyeing and printing, as well as to adopt styles and designs that suit various markets. Useful experience can be gained in these areas through export processing arrangements, under which Chinese enterprises produce goods that meet foreign buyers' specifications and requirements. 5.18 Other light industrial exports consist mostly of labor-intensive consumer goods (canvas and rubber shoes, brushes, carpets, porcelain, paper, etc.) and metal products (kitchen utensils and consumer engineering goods /1 Four involve cotton clothing: trousers, slacks or shorts for men or women; shirts (not knit) for men and boys; shirts and blouses (not knit and knit) for women, girls and infants; and cotton gloves. In most instances, the quotas allow some growth over past US imports from China. There are provisions that allow quotas to be switched among categories and years. - 459 - such as radios, electric fans, watches, clocks, thermos bottles, sewing machines, bicycles, etc.). So far, these products have largely gone to the poorer Asian and African countries. To capitalize on the large potential of higher income markets, Chinese enterprises require knowledge of other coun- tries' designs, styling, demand trends and marketing channels; this can be attained by frequent travel abroad or even establishing overseas marketing operations, and by greater direct contact with foreign buyers. Judging from the experience of semi-industrialized countries, China's prospects for breaking into new markets are quite good. 5.19 While China's exports of machinery and equipment amounted to only $464 million, or 3.4% of total exports in 1979, China is already one of the world's major producers of these goods. China's own market for capital goods is large and growing fast, and potential scale economies are enormous. China's strength at present is in capital equipment specially designed or peculiarly suited to developing countries with conditions similar to those in China: for example, small-scale plants in processing industries (e.g. particle board, paper or phosphate fertilizer), medium-sized and small tractors, pumps, and other farm machinery; electric motors, generators and equipment for small hydrostations; machinery for light industries such as textiles; and cheap, durable machine tools such as general purpose lathes. However, there is con- siderable potential for making goods to order (castings, components, and finished equipment of many other types), provided that Chinese industries can meet foreign specifications and requirements. To make existing capital goods more saleable abroad, improvements in performance and design are generally needed. These can be partly achieved by replacing unsuitable domestic parts by imported, high quality parts (such as numerical controls for lathes). Also, after-sale technical servicing of equipment and provision of spare parts are essential. The world market for machinery and equipment is wide open, particularly markets in most developing countries; and import restric- tions are rare and tariffs extremely low in developed countries. Thus, from both the demand and supply sides, China is in a favorable position to expand its exports of machinery and equipment, as well as consumer engineering products. 5.20 A major constraint to the expansion of light manufactured exports is the limited range and quantity of raw materials available and, for machinery exports, the lack of some critical high quality components. However, China need not to rely only on its own supplies, which sometimes are of inferior quality, but can instead import raw materials or key components. This approach is particularly economical in terms of transportation costs, at least for industries in the coastal area, thus leaving domestic raw materials for industries in the hinterland, which manufacture for domestic markets. The raw material imports can be financed by foreign exchange loans, which are repaid using some of the foreign exchange generated by exporting the manufactured products. This revolving foreign exchange loan fund can be supported by possible external borrowing. The Bank of China's Shanghai branch has already initiated such a loan program, which may be expanded and extended to other cities. - 460 - 5.21 Even with the new internal foreign exchange settlement rate, additional incentives may still be needed to expand manufactured exports, particularly tax incentives. Such incentives would make Chinese exports more competitive on the world market; the loss in government revenue would be compensated for by the increase in foreign exchange earnings. This matter needs careful study to formulate a rational incentive system. 5.22 Invisible Receipts. The prospects for foreign exchange earnings from nonmerchandise sources, particularly tourism and transportation, appear to be quite good. Income from port dues and shipping operations have increased very rapidly in recent years (43% a year during 1977-80) and should continue rising rapidly as the merchant fleet and trade expand and port facilities are enlarged. China's merchant marine, one of the world's largest fleets, has increased dramatically in size and quality over the past decade, reaching a total tonnage of about 10 million dwt, including coastal vessels. With further expansion underway, the Chinese fleet may be able to handle all the country s basic needs for chartered tonnage by the mid-1980s. Vessels purchased have shifted from secondhand to newer ships, and more attention is being paid to Western-style ship management, including the use of containers. As trade expands, China needs, in particular, additional shipping capacity to move in such bulky and heavy goods as grain, iron ore, and pig iron, and to move out oil, coal, machinery and light industrial products. However, major constraints are port capacity and port and shipping management. If these problems can be solved, income from port dues and shipping can continue to increase very rapidly. 5.23 Tourism has also grown rapidly in recent years. However, hotel accommodation in Beijing and Shanghai has become an increasingly serious constraint, although surplus hotel capacity exists in smaller cities. Following the current readjustment policy, and because of the lack of urban infrastructure, the Chinese authorities have decided to scale down their original plans for new hotel construction. In Beijing, one new hotel has already partially opened in early 1981, and another hotel with 528 rooms is scheduled to be completed by the end of 1981 and one with 313 rooms in 1982; the latter two are both joint venture projects. At the same time, China is putting emphasis on remodeling existing facilities, opening up government guest houses and old resorts and villas, as well as constructing smaller hotels. At present, there are about 30,000 beds; efforts to expand hotel accommodations should achieve a 50% increase by 1983. Under the current plan, China expects to accommodate 3.5 million visitors by 1985 (scaled down from a 5 million target), implying an annual growth rate of 24%, which seems rather ambitious. While tourism is soon likely to exceed remittances as a major source of nonmerchandise exchange earnings, the annual average rate of increase may not exceed 20% after the expected sharp increases in 1982/83. 5.24 Remittances from overseas Chinese have traditionally been China-s most important source of nonmerchandise foreign exchange earnings. With a small number of emigrants in the past 30 years, and fewer ties between relatives as those of the present old generation pass away, the long-term - 461 - outlook for remittances does not appear very promising. Remittances could, however, increase at a rate slightly higher than world inflation. They are forecast to increase to $1 billion by 1985, implying an average annual increase of 10%, which seems reasonable. 5.25 China has substantial business investments in Hong Kong, which bring in net foreign exchange earnings after deducting profits reinvested in the Hong Kong holdings. Besides insurance companies, retail outlets and real estate holdings, China has recently organized eight new engineering and construction companies to work in other countries. The work includes surveying, designing, building, installing, as well as constructing bridges and roads, in an effort to convert labor services into foreign exchange./1 China has recently also reached an agreement with Japan for a joint venture department store in Tokyo; if it succeeds, this kind of retail outlet may be duplicated in other countries. External Borrowing 5.26 Only since 1978 has China begun to borrow from developed market economies to finance capital goods imports for development projects. It gradually overcame ideological constraints by first accepting external commer- cial bank credit in the form of deposits with the Bank of China and suppliers' or buyers' credits in the form of deferred payments. There are few such constraints now, however, and China has already accepted external capital in the form of bilateral concessional loans, import-export bank credits, official guaranteed export credits, buyers and suppliers' credits, as well as commer- cial bank credits. It has already drawn on the IMF-s financial facilities and is ready to receive IDA credits and IBRD loans. External financing is now considered an important element in overcoming foreign exchange constraints to development and as a vehicle for achieving modernization; external borrowing is now a part of overall development planning (paras. 4.28-4.30). 5.27 During 1979/80, following the conclusion of trade agreements with several developed market economy countries, China also negotiated some credit arrangements. However, only a few official credits had concessional terms, and the total amount of $516 million is relatively small (Table 5.3). The most important official credit comes from Japan-s Overseas Economic Coopera- tion Fund (OECF); the first credit, for Y 50 billion (or $225 million), was extended in 1980 at 3% interest and with a 30-year maturity, including 5 years of grace. The OECF credit was to finance six infrastructure projects and procurement, and with a few exceptions was untied. With satisfactory progress on these projects, a second OECF credit, for Y 56 billion ($265 million) under the same conditions as the first credit, was agreed in early 1981 for further implementation of the same six projects. Prospects for further OECF credit seem good. The most favorable official credits are the two from Belgium (no interest and 30-year maturity), although the amounts are small, i.e. about $13 million each. Recently, Australia reportedly agreed to provide a $58 million aid program in technical cooperation; details of the agreement are not yet /1 Nai-Reunn Chen, "China's Economy and Foreign Trade, 1978-79," published by the US Department of Commerce. - 462 - Table 5.3: AGREEMENTS ON OFFICIAL OR OFFICIALLY SUPPORTED MEDIUM- AND LONG-TERM EXTERNAL LOANS a Loan amount (in millions) Original $ equivalent Country currency approximately Terms Date signed Purposes, agencies and remarks Official Credit Belgium BF 300 13 No interest. Maturity 30 years, November 1979 May cover downpayment requirements for Belgian/French power including 10-year grace period. plant sale. BF 280 million distributed by end-November 1980. Belgium BF 300 13 Same as above. February 1981 Japan Y 50,000 225 3% interest. Maturity 30-years, April 1980 First Yen credit from Japan's Overseas Economic Cooperation including 10 years of grace Fund. Initial loan to be drawn down in Japanese fiscal year period. The disbursement period 1980 for six infrastructure projects. Procurement with a few is 5 years. exceptions is generally untied. Additional amounts will be forthcoming as the projects progress. Japan Y 56,000 265 Same as above. December 1980 Second OECF Yen credit for financing the same six projects as under the first credit. Total 516 Officially Sup- ported Credit kustralia A$ 50 45 7.50% interest for 5 years; March 1979 Export Finance and Insurance Corporation credit for capital 7.75% interest above 5 years. goods. By end of December 1980, $19 million had been disbursed. Jnited Kingdom 1,200 7.50% interest for 5 years. December 1978 Signed with the Bank of China by seven British banking groups to cover British export contracts valued at over $5 billion. The UK Export Credits Guarantee Department will provide 85! of the cover and subsidize the interest rate. By end-December 1980, $100 million had been disbursed. France PF 30,000 7,000 7.25% interest for loans with May 1979 Syndicated by 18 French banks. Tied to purchases under a long- less than 7 years of maturity. term trade agreement up to 1985. The credit can be refinanced 7.3% for loans over (7) years up by official BCFF and is guaranteed by COFACE. By end-December to 10 years of maturity. 7.75% 1980, $10 million bad been disbursed. for loans over 5 years. Japan Y 420,000 2,000 6.25% interest. (Disbursement May 1979 Japanese Exim Bank will lend directly to Bank of China for the within 5 years.) Maximum matur- development of China's oil and coal resources. Procurement is ity is 15 years (including 5 generally untied. Technical problems delayed opening of credit years of grace). until December 1979. By end-December 1980, $435 million had been disbursed. Italy 1,000 7.5% interest. May 1979 Consortium of Italian banks led by Inastituto Mobiliate Its- Maturity: 8-1/2 years. Effective liano. Tied to transactions under Italo-Chinese long-term October 1979 trade agreement. Mediocredito Centrale will provide interest rate subsidy and guarantee. 75 Same as above. May 25, 1979 Signed by Banco di Sicilia. Canada 2,000 7.5% interest for less than 7 May 1979 Interest rate subsidized by Canadian Export Development Cor- year maturity, 7.75% for 7-8 Effective poration (EDC). Credit will be available only on a contract- year maturity, and 8% for 8-9 August 1979 by-contract basis. year maturity. Belgium BF 5,000 170 7.50-7.75% interest. November 1979 Societe Generale de Banque Bruxelles, Banque Bruxelles Lambert and three other Belgian banks. Sweden 350 7.5% for credit up to 5 year December 1979 The Kingdom of Sweden AS Svensk Export Credit. For transac- maturity, 7.5% for credit of tions based on Swedish-Chinese trade agreement. By end-December 5-10 year maturity. 1980, $10 million had been disbursed. Norway 100 Same as above. January 1980 A/S El*eportfinans, Oslo. Argentina 300 7.5% interest. June 1980 Banco Central de Is Republica Argentina. Fed. Republic OM 500 235 n.a. November 1980 The Kreditanstalt fur Wiederaufbau concluded a framework agree- of Germany ment with the Bank of China to finance exports to China with a credit line of DM 500 million if export guarantees are granted by German Credit Insurance Company (Hermes). Total GRAND TOTAL 1,1 /s The US Export-Import Bank became eligible to do business in China on April 2, 1980. A $2 billion line of credit has been proposed to China for a period of 5 years. The $2 billion is not a firm commitment; the US Exim Bank's usual policy is to make loans available on a case-by-case basis. The interest rate is 8.75% and the repayment and grace periods are subject to negotiation. Source: Compiled from various official and unofficial sources. - 463 - known. It is reported that the Federal Republic of Germany could grant about $20 million in capital aid in 1982 and that in the near future China might reach India's grant level of $120 million annually. Technical aid to China in 1981 could amount to $6 million. 5.28 The largest amount of official export credit thus far comes from the Japanese Export-Import Bank's $2 billion credit agreement concluded in 1979 to finance the development of China's oil and gas resources. This is an untied credit and the terms are relatively favorable: 6.25% interest and a maximum maturity of 15 years, including 5 years of grace. Outline agreements for officially guaranteed export credits with at least 11 countries amounted to about $14.5 billion, all with slightly more favorable terms than a typical export credit, i.e. at 7.5% interest, with 5-8 years- maturity on the average (Table 5.3). However, individual contracts still have to be signed before any part of the credits becomes effective. China pays no commission charges before then. By the end of 1980, at least $564 million had been disbursed, of which the $435 million from the Japanese Export-Import Bank is the single largest item. 5.29 China also has medium-term lines of credit, totalling $3.6 billion with a large number of commercial banking institutions, at interest rates fractionally above LIBOR and with an average maturity of five years. Except where the credit is used to finance a project (e.g. tourist hotel construc- tion), it is untied. Very little of the untied credit has been drawn down, in view of the recent high LIBOR rate. 5.30 China's total external debt outstanding at the end of 1980 was officially estimated at $3.4 billion. However, no breakdown by type of debt is available. From the scanty information available, it is estimated that perhaps $200-300 million is in official loans on concessional terms, and the rest is export credit, suppliers' credit, deferred import payments and commercial bank loans. It is also estimated that about $550 million of the $3.4 billion in outstanding loans had not been disbursed by the end of 1980, but will be disbursed by 1983. 5.31 The lines of credit available to China are clearly substantial, as is the country's potential for external borrowing. However, the Chinese authorities are very sensitive to the debt burden problem. They have indicated that whenever possible, loans with the most favorable terms (such as bilateral, long-term, low-interest loans and IDA-type credits) will be used first, then officially guaranteed medium- and long-term loans such as Exim Bank credits, and then export credits. - 465 - APPENDIX A Foreign Trade Corporations Under the Ministry of Foreign Trade 1. China National Technology Import Corporation 2. China National Machinery Import and Export Corporation 3. China National Minerals and Metals Import and Export Corporation 4. China National Chemicals Import and Export Corporation 5. China National Instrument Import and Export Corporation 6. China National Cereals, Oils and Foodstuffs Import and Export Corporation 7. China National Textile Import and Export Corporation 8. China National Light Industrial Products Import and Export Corporation 9. China National Arts and Crafts Import and Export Corporation 10. China National Native Products and Animal By-Products Import and Export Corporation 11. China National Medicines and Health Care Products Import and Export Corporation 12. China National Packaging Import and Export Corporation 13. China National Foreign Trade Transport Corporation 14. China National Foreign Trade Warehousing Corporation 15. China National Import and Export Goods Inspection Corporation 16. China Foreign Trade Consultancy and Technical Services Corporation - 466 - APPENDIX B Corporations Not Under the Ministry of Foreign Trade That Can Engage in Exporting and Importing 1. China National Machinery and Equipment Import and Export Corporation and its branches 2. China Aviation Technology Import and Export Corporation 3. China Electronic Technology Import and Export Corporation 4. China North Industries Corporation 5. China Corporation of Shipbuilding Industry 6. China Precision Machinery Import and Export Corporation 7. New Times Corporation of China 8. China Atomic Industrial Corporation 9. Great Wall Industrial Corporation 10. Yanshan Science and Technology Corporation 11. China National Metallurgical Products Import and Export Corporation 12. China National Seeds Import and Export Corporation 13. China National Breeding Stock Import and Export Corporation 14. Dong Fang Import and Export Corporation 15. China National Complete Plant Export Corporation 16. China Films Import and Export Corporation 17. China New Building Materials Corporation World Bank Publiations of Related Interest Bangladesh: Current Trends agricultural growth. Offers recom- Brazil: Integrated and Development Issues mendations for policy changes. Development of the Carl A. B. Jayarajah, 1982. 259 pages (including annex, Northwest Frontier chief of mission, and others statistical appendix). Dennis J. Mahar, chief of Provides an update on current ISSY 0253-2123. ISBN 0-8213-0095-4. mission, and others development with emphasis on rural $10 paperback. Points out that the Brazilian northwest and industrial development and has the potential to become an domestic resource mobilization and important agricultural and timber- suggests that more funds should be Brazil: Human Resources producing region, as well as a place channeled into agriculture, education, Special Report where migrants from other parts of health, and population control. Peter T. Knight, mission chief, the country may be productively and March 1979. x + 116 pages (including Ricardo J. Moran, deputy chief, permanently settled on small-scale and others farms. Thus, economic development map, annexes, appendix). aof the region is currently one of the Stock No. RC-7904. $5.00 paperback. Discusses the dominant patterns of high priorities of the Brazilian govern- Brazil's demographic history and the ment. Outlines development plans for outlook through the year 2000. Con- the area; examines population, migra- NEW cludes that, although the Brazilian tion, and social indicators; and economy has grown twice as fast as considers issues and recommenda- the population, the growth process tions related to the identification and Brazil: A Review of has left large differences In indices of protection of Indian lands, land Agricultural Policies economic welfare and basic needs settlement, and environmental Reviews agricultural performance and satisfaction among various popula- concerns. policies in Brazil in recent decades. tion groups; that policies to increase June 1981. ui + 101 pages (including Particular attention is given to rural productivity outside the modern Jn 91 l+11pgs(nldn credit, which has been the major tool sector of the economy will be crucial annex). used by the government to promote to achieving more equitable socio- Stock No. RC-8101. $5.00 paperback. economic development; and that accelerating progress in the provision of basic services will require not only increased financial backing but considerable efforts to overcome institutional problems. October 1979. xii + 548 pages (includ- ing map, 4 annexes). Stock No. RC-7909. $20.00 paperback. The Commonwealth Carib- The Comoros: Problems and which can be alleviated if aided by a bean: The Integration Prospects of a Small, Island vigorous effort in petroleum explora- tion and a revision of the domestic Experience Economy price policy for petroleum derivatives. Sidney E. Chernick and others Pierre Landell-Mills, chief of p oly fxr per e divatves Broad issues of regional integration mission, and others July 197 xi a64 pages (includ- with special attention paid to Describes the principal features of the appendix). English and Spanish. unemployment and mechanisms economy and summarizes the main crucial to the success of such instru- sectoral and structural constraints to Stock [los. RC- 7908-E, RC- 7908-S. ments as the Caribbean Free Trade development. Notes that, in view of its $20.00 paperback. Association and the Caribbean extreme poverty, the Comoros will Common Market. require a substantial inflow of The Johns Hopkins University Press, resources and technical assistance in Egypt: Economic 1978. 536 pages (including appen- the future. A statistical annex provides Management in a Period a comprehensive compilation of of Transition dixes, statistical appendix, index), social and economic data not Khalid lkram and others LC 77-17246. ISBl 0-8018-2089-8, otherwise available. $30.0 (21.0) hrdcvenThe most detailed examination of the $50.00 821.00) hardcover; July 1979. vii + 177 pages (including Egyptian economy to appear since ISBN 0-8018-2090-1, $9.95 (STOO0) 5 maps, 3 annexes). English, French, the 1960s and the first to lay heavy paperback. and Spanish. emphasis on economic management Stock los. RC-7907-E, RC-7907-f. and policies. Chile: An Economy In RC- 7907-S. $5.00 paperback. The Johns Hopkins University Press, Transition 1980. 464 pages (including statistical fred D. Levy, chief of mission, Dominican Republic: Its appendix, index). and others Main Economic Develop- LC 80-552. ISBN 0-8Q18-2418-4, $32.50 Traces the development of the ment Problems (£19.50) hardcover; Chilean economy since the Great Luis Landau, chief of mission, ISBN 0-8018-2419-2, $11.50 (£8.00) Depression of the 1930s and empha- and others paperback. sizes economic policies and events of the 1970s and their effects on Chile's Notes that despite its accomplish- economic prospects. Finds that the ments in the way of savings, foreign El Salvador: Demographic ultimate success of the government's investment, tourism, exports, and Issues and Prospects policies depends on its ability to growth of gross domestic product farid Dhanji demonstrate that efficient resource (GDP), the Dominican Republic still allocation and accelerated growth can faces severe poverty and unemploy- Discusses the country's urgent need be made consistent with an equitable ment. Suggests economic reforms to to formulate an urban strategy to deal distribution of income and the relief strengthen the economy, stimulate with growing population stresses by of absolute poverty. job creation, and diversify exports. setting priorities for public invest- ments and activities between and in January 1980. u, iii, viii + 584 pages December 1978. xv + 468 pages the cities, and turning the flow of (including map, 2 appendixes, (including maps, statistical appendix). migrants to productive use. 96 tables, glossary). English and Spanish. October1979. ii + 69 pages (including Stock No. RC-8001. $20.00 paperback. Stock Nos. RC-7805-E, RC-7805-S. map, statistical appendix). English $20.00 paperback. and Spanish. Economic Growth of Stock Nos. RC-7910-E, RC-7910-S. Colombia: Problems and Ecuador: Development $3.00 paperback. Prospects Problems and Prospects Dragoslav Avramovic Alexander G. Nowicki, chief of and others mission, and others NEW Assesses the country's needs and Reviews the country's main The Gambia: Basic Needs in makes recommendations for future socioeconomic sectors and focuses The Gambia growth. on the traditional quality of Ecuador's economy which makes it difficult to 11einz B. Bachmann, mission The Johns Hopkins University Press, bring the benefits of modern develop- chief and coordinating author, 1972. 530 pages (including statistical ment to a majority of the poor. Rene Vandendries, and annex, maps). Discusses the expected shortfall in Ann MacNamara LC 78-186501. ISBN 0-8018-1389-1, foreign exchange and fiscal revenues This report outlines a basic needs $3000 (£1800) hardcover: costrategy designed to guide the Gam- ISBN 0-8018-1397-2, $9.95 (£6.00) bian government and the World Bank paperback. in making policy decisions that will increase the chances of base survival for that country's people. The Gambia urban labor markets; and formulates for increased public expenditure for is extremely poor; the rural popula- employment and income policy basic needs services, such as educa- tion is worse off than those living in issues that are important in address- tion, health, water, and housing. urban areas; and women and ing Indonesia's longer-term Argues that a rapid decline in fertility children, who make up 30 to 40 development strategy. will facilitate the implementation of percent of the population, are the the government's commitment to the most disadvantaged group and suffer July 1980. xiap + 187 pages (including provision of basic needs, but that the most from poor health and appendix, 2 annexes). satisfaction of basic needs, such as malnutrition. A strategy is proposed Stock lo. RC-8008. $5.00 paperback. education, is an important instrument that is aimed at improving the health for securing lower fertility. Explores and nutritional status of pregnant the socioeconomic determinants of women and lactating mothers by Ivory Coast: The Challenge fertility, the current status of the coun- combating endemic disease, of Success try's family planning program, the improving the supply and distribution Bastiaan A. den Tuinder social status of women and fertility, of food, improving eating habits, and and makes recommendations for a supplying clean water in rural areas. and others comprehensive population policy. December 1981. xi + 142 pages Investigates the so-called "Ivorian July 1980.xiii + 213 pages (including Miracle" and ways to maintain growth Julio1980. (including 2 annexes). while reducing or eliminating gaps in bibliography). Stock No. RC-8104. $5.00 paperback. income levels and opportunities for Stock No. RC-8010. $10.00 paperback. advancement. Guatemala: Economic and The Johns Hopkins University Press, Korea: Policy Issues for Social Position and 1978. 464 pages (including appen- Lng-Term Development Prospects dixes, statistical appendix, index). Farvez Hasan and D. C. Rao John R. Hansen, chief of LC 76-47395. ISBN 0-8018-1939-3, Can Korea's growth rate continue with mission, and others $28.50 (20.00) hardcover greater consideratins of equity, Concludes that, despite current ISBN 0-8018-2099-5, $12.95 (X6.25) structural changes to maintain the problems due to the fall in coffee comparative advantages of Korean prices, the economy is financially exports, and new roles for govern- sound and has good future growth Kenya: Into the Second ment in response to changing prospects. Decade domestic and external conditions? August 1978. 181 pages (including John Burrows and others The Johns Hopkins University Press, statistical annex, map annex). 1979. 558 pages (including map, Analyzes Kenya's fast pace of develop- appendixes, index). Stock 1No. RC-7801. $5.00 paperback. ment and its potential and scope for utilizing domestic and foreign LC 78-21399. ISB/ 0-8018-2228-9, resources for future development. $35.00 (£22.75) hardcover; India: Economic Issues in T . ISBN 0-8018-2229-7, $15.00 (£7.75) the Power Sector The Johns Hopkins University Press, paperback. 1975. 546 pages (including maps, C. Taylor appendixes, statistical tables, chart, Reviewing the country's demand for index). Korea: Problems and issues electricity, points out that economic LC 75-10895. ISBN 0-8018-1754-4, in a Rapidly Growing growth in India depends critically on the development of the power sector 5.00 (£18.00) hardcover; Economy and suggests that public funds be ISBN 0-8018-1755-2, $15.00 (£5.50) Parvez Hasan supplemented by increased tariffs to paperback. Analyzes the phenomenal economic augment the internal cash generation progress made by Korea since the of the State Electricity Boards, as well early 1960s. as provide for a more efficient use of Kenya: Population and power resources. Development The Johns Hopkins University Press, November 1979. iii + 175 pages Rashid Faruqee, chief of 1976. 292 pages (including map, 5 (including map, 3 annexes, 3 graphs, mission, and others appendixes, statistical appendix, index). organization chart). States that fertility in Kenya is high, LC 76-17238. ISBY 0-8018-1864-8, Stock No. RC-7911. $5.00 paperback. appears to be increasing, and shows considerable variation by region, tribal group, and socioeconomic Indonesia: Employment and status. Recognizes that rapid popula- Madagascar: Recent Income Distribution in tion growth is resulting in the need Economic Development and Indonesia Future Prospects Mark Leiserson, mission chief PC. Joshi, mission chief, and and coordinating author others Examines, in the light of recent Examines demographic, employ- economic developments and the ment, wage, and income trends; government's objectives, the strategy analyzes the functioning of rural and underlying both the 1978-80 priorities for the country in the,1980s Industry, tourism, energy, and Development Plan and those plans to and the role of external assistance. transportation, as well as human be implemented subsequently. Points resource development. out that the overall performance of December 1980. vi + 172 pages the economy has been disappointing (including 5 annexes, statistical December 1979, ii, ii, vil + 123 pages in recent years, but that the govern- appendix). (including map, 2 annexes, statistical ment has been able to focus on Stock No. RC-8014. $5.00 paperback. appendix). certain important social objectives: Stock NYo. RC-7912. $5.00 paperback. the satisfaction of basic needs, reduc- tion of urban-rural income disparities, Mexico: Manufacturing Sec- and the protection of living standards toriPospectsfand Plc Nigeria: Options for of low-income urban groups. Pro- tor Prospects and Policies Ngra pin o poses a policy framework Alexander G. Nowicki, chief of Long-Term Development characterized by increased reliance mission, and others Wouter Tims and others on external assistance, vigorous Emphasizes three basic objectives for Examines prospects through the early export promotion, and a general Emhszstrebscojciedo relaxation of economic controls, and developing the manufacturing indus- 1980s, with detailed description of relaatifcon omdrs aicctrs and try-rapid and efficient growth of the petroleum industry and brief considers the feasibility an production, management of aspects discussion of education, agriculture, appropriateness of this strategy in of the manufacturing sector related to manufacturing, and infrastructure. omy and long-term development the balance of payments, and the The Johns Hopkins University Press, goals of the country. creation of productive jobs for the 1974; 2nd printing, 1975. xi + 256 goalsber of 80 the cn 30country's rapidly growing labor force. pages (including statistical annex, (including 6 annexes, 4 appendixes). March 1979. 174 pages (including maps). English and French. 5 annexes). LC 73-19354. ISBN 0-8018-1602-5, Stock No. RC- 7905. $5.00 paperback. $19.00 (£12.25) hardcover; Stock Nos. RC-8015-E, RC-8013-f. $15.00 ISBN 0-8018-1603-3, $6.00 (£4.25) paperback. paperback. NEW Malaysia: Growth and Equity Papua New Guinea: Its in a Multiracial Society Morocco: Economic and Economic Situation and Kevin Young, Willem Bussink, Social Development Report Prospects for Development and Parvez Hasan Christian Merat, coordinating George B. Baldwin and others Rapid growth is essential to achieving author, and others Assesses prospects for increasing Malaysia's economic and social objec- This study examines the growth and economic self-reliance and financial tives; favorable resource prospects structural changes the Moroccan creditworthiness by developing con- are conducive to such growth. economy has experienced during the siderable natural resources. e J s ten-year period, 1968-77. It seeks to The Johns Hopkins University Press, determine the results that can be The Johns Hopkins University Press, 1980. 364 pages (including appen- expected from the annual plans of 1978. xvi + 22 pages (including dixes, index). financial adjustment that dominate appendixes, statistical appendix, LC 79-3677. ISBN 0-8018-2384-6, the period 1978-80 and looks ahead bibliography). $25.00 (917.50) hardcover; to the overall prospects for the econ- ISBN 0-8018-2385 -4, $12.95 (£5.50) omy during the period 1981-90. LC 77-17242. ISBN 0-8018-2091-X, paperback. Considers growth problems at the $6.50 (£4.50) paperback. sector level and outlines the general employment situation and the social development strategy the country is NEW The Maldives: An Introduc- pursuing. tory Economic Report October 1981. xxxi + 422 pages Papua New Guinea: Selected K. Sarwar Lateef, chief of (including statistical appendix). English Development Issues mission, and others and French. Alice Galenson, chief of Provides a brief introduction to the Stock Nos. RC-8103-E, RC-8103-F. mission, and others Maldives, a nation that is among the $ twenty poorest countries in the world, 20.00 paperback. This report constitutes part of a con- and points out that the fisheries sec- tinuing dialogue between the World tor accounts for 44 percent of Bank and the Government of Papua employment and nearly all visible Nepal: Development Per- New Guinea on a wide range of export earnings and discusses other formance and Prospects economic and sector issues. It important sectors-agriculture, tour- Yukon Huang, chief of focuses on a few specific areas that ism, cottage industries, health, and mission, and others were agreed to be among the most education. Outlines the development important for the country's develop- Reviews Nepal's achievements during ment during the 1980s. Points out the Fifth Development Plan and its that the major goal facing the country strategy options for the Sixth Plan for in the 1980s will be to provide rising key sectors such as agriculture, incomes for its people and productive ivelihood for its growing labor force. Discusses, in particular, the employ- economic and financial crisis in The Philippines: Priorities ment, agriculture, forestry, fisheries, 1977-78. Examines the stabilization- and Prospects for and industry sectors. economic recovery program the Development government started in 1978 and DeseloJCet 1982. 280 pages (including 4 annexes). notes that, in spite of the program's Russell J. Cheetham, Edward Stock No. RC-8201. $10.00. success, the present economic situa- K. Hawkins, and others tion remains highly volatile with high Assesses the country's long-term Paraguay: Economic inflation, high public-sector deficit, prospects for growth and projects unemployment, stagnating possible effects of the government's Memorandum agricultural production, rapid popula- development strategy on employment Manmohan Agarwal and others tion growth, and widespread poverty. and income distribution. Reviews Paraguay's high economic Considers key policy measures that growth rate generated by expanded are necessary to provide a solid basis The Johns Hopkins University Press, agricultural production and the con- for medium-term and long-term 1976. 594 pages (including maps, struction of two huge hydroelectric development efforts. 3 appendixes, statistical plants. Highlights the need to June 1981. vil + 220 pages (including appendix, index). improve support services in the 3 annexes, statistical appendix). LC 76-17243. ISBN 0-8018-1893-1, countryside, promote industrial English and Spanish. $8.50 (£6.00) paperback. development, increase expenditures on education, health, and rural Stock los. RC-8102-E, RC-8102-S. development, and improve the $10.00 paperback. Portugal: Agricultural tax base. Sector Survey June 1979. v + 178 pages (including The Philippines: Aspects of Jacques Kozub, chief of map, annex, statistical appendix). the Financial Sector mission, and others Stock No. RC- 7906. $5.00 paperback. Edward K. Hawkins, chief of Analyzes the main issues of mission, and others agricultural development and iden- tifies investor needs for future World Paraguay: Regional Focuses on the implications of pro- iank consideration. Development In Eastern posals to move the country's banking Paraguay system towards more universal bank- November 1978. v + 323 pages guayfing and suggests ways to mobilize (including 2 appendixes, 10 annexes, Alfredo Gutierrez, chief of savings to strengthen the financial maps). mission, and others sector. Stock No. RC-7803. $15.00 paperback. Reviews recent economic develop- A Joint World Bank/IMF Study. May ments and provides a framework for 1980. ix + 99 pages (including map, policy actions and investment .3 appendixes). Portugal: Current and projects designed to make maximum Prospective Economic use of development possibilities, and Stock No. RC-8006. $5.00 paperback. suggests the need to coordinate Trends public-sector activities in a Basil Kavalsky, chief of geographic and sectoral dimension to Philippines: Industrial mission, and exploit the eastern region's natural Development Strategy and Surendra Agarwal resources. Policies Discusses Portugal's difficult transi- August1978. viii + 50 pages (includ- Barend A. de Vries, chief of tion after the revolution of 1974/75 ing maps, statistical appendix). English mission, and others and notes that the country has a and Spanish. Outlines the country's industrial sound economic base, but will have Stock los. RC-7802-E, RC-7802-S. development strategy, its major to come to terms with the serious $3.00 rback objectives, and industrial investment unemployment problem, increase papeb . priorities and determines that the investment and output in export- nontraditional manufactured export oriented manufacturing, and improve Peru: Major Development drive should continue with increased agricultural productivity. Policy Issues and participation by industries, firms, and November 1978. vi + 52 pages Recommendations regions and that policies for the home (including statistical appendix, map). Recom endaionsindustries should be reoriented Ulrich Thumm, chief of toward better use of capital and Stock No. RC-7804. $3.00 paperback. mission, and others domestic resources and more Notes that expansionary monetary employment creation. Romania: The Industrializa- and fiscal policies pursued during May 1980. ix + 301 pages (including tion of an Agrarian Economy most of the 1970s led to high public- statistical appendix, 9 annexes). under Socialist Planning sector and balance-of-payments Stock No. RC-8007. $15.00 paperback. Andreas C. Tsantis and deficits and to increased recourse to AdesC sni n foreign financing. The situation, Roy Pepper exacerbated by a sharp deterioration The first comprehensive study of the of the country's terms of trade during Romanian economy, the study con- 1975-78, culminated in a severe tains a data base of the economy and discusses some of the determinants change that began in the middle of describes the planning and manage- of poverty, the impact of socio- thV 19th century, with development ment system. economic and political factors on the based primarily on indigenous capital poor, and the relationship between and skills and the gradual assimila- The Johns Hopkins University Press, basic needs and poverty. Formulates tion of foreign technology. 1979. 742 pages (including maps, guidelines for policies aimed at appendixes, bibliography), alleviating poverty and promoting March 1980.xio + 232 pages (includ- LC 79-84315. ISBN 0-8018-2269-6, equitable growth. Companion paper ing statistical appendix). $35.00 (£22.75) hardcover: to Thailand: Toward a Development Stock Yo. RC-8002. $10.00 paperback. ISBN 0-8018-2262-9, $15.00 (I 7.00) Strategy of Full Participation, paperback. March 1980. Turkey: Policies and June 1980. viii + 56 pages (including Prospects for Growth Seychelles: Economic 2 annexes, maps). Vinod Dubey, mission chief, Memorandum Stock No. RC-8011. $3.00 paperback. Shakil Faruqi, deputy mission Robert Maubouche and chief, and others Naimeh Hadjitarkhani Thailand: Industrial States that overall economic growth Traces the development of Seychelles Development Strategy in during the 1960s and most of the economy from its primary depen- Thailand 1970s was good compared with other dence on the export of copra and Bela Balassa, chief of mission, developing countries. Concludes, cinnamon to a service economy with and others however, that the recent sharp tourism as its major industry Con- increase in oil prices had an unfavor- cludes that the country's management Notes that the country had an out- able impact on the country and that capability is impressive and its standing economic record during the resumption of sustainable growth development strategy well designed, postwar period, especially between depends on the adoption of an but that it is likely to be confronted 1960 and 1973, but points out that export-oriented strategy: on policies with financial constraints in the near there is a slowdown in the growth of aimed at increasing domestic savings future, and its investment program Thai exports that will have a negative and at keeping aggregate demand for will require increased domestic effect on the economy. Examines the resources in line with aggregate sup- efforts, as well as substantial levels of prospects for future exports of pro- ply; and on the support for these external capital aid. cessed food and manufactured goods policies by various donors and the and analyzes the country's compara- financial community. July 1980. ii + 71 pages (including tive advantage in these products. statistical appendix). Considers the need for the economic March 1980.sxxxi + 316 pages (includ- Stock No. RC-8009. $3.00 paperback. evaluation of large government-spon- ing 6 appendixes, statistical annex). sored projects; examines measures of Stock No. RC-8003. $15.00 paperback. import protection and export promo- The Solomon Islands: An tion schemes and questions relating Introductory Economic to regional development. Provides NEW recommendations for a coherent Report industrial development strategy for Edward K. Hawkins, chief of the country that is aimed at increas- Uganda: Country Economic mission, Nizar Jetha, deputy ing industrial employment, Memorandum chief, and others expanding small and medium-sized Mark Baird, mission leader, firms, and improving the living stan- and others States that the country faces four dards of the poor.anohr main development issues: (1) creating This is the first economic report pre- sufficient jobs for a fast-growing work June 1980. x + 59 pages. pared by the World Bank on Uganda force; (2) increasing,the opportunities Stock lo. RC-8012. $3.00 paperback. since 1969. It reviews events prior to for earning cash incomes in rural the 1978-79 war and developments areas; (3) balancing regional since the war, including the govern- disparities; and (4) improving educa- Thailand: Toward a Develop- ment's new financial program. tional and training facilities at all ment Strategy of Full Outlines the priority areas for further levels to raise the supply of action and the implications of the administrators, managers, and Participation balance-of-payments outlook for aid, professionals. E.R. Lim, chief of mission, requirements. A more detailed review April 1980. viii + 134 pages (including John Shilling, deputy chief, of the problems and issues in five statistical appendix). and others major sectors-agriculture, industry, stati stca apni) transport energy, and education - is Stock Yo. RC-8004. $5.00 paperback. Shows that rapid and sustaied also discussed. growth has helped a substantial pro- portion of the population, but that, to 1982. v + 161 pages (including statisti- Thailand: Income Growth a large extent, the rural population cal appendix). and Poverty Alleviation has not benefited. Stresses that the ISBN 0-8213-002 7-X. $5.00 paperback. mission, country should not follow a type of John Shilling, chief of mission "trickle down" development strategy, and others but should focus on raising the pro- Synthesizes the results of four special ductivity and incomes of the poorest studies on poverty-related issues and farmers. This strategy would be a logical continuation of the economic Uruguay: Economic Yugoslavia: Development Zaire: Current Economic Memorandum with Decentralization Situation and Constraints Alfredo Gutierrez, chief of Vinod Dubey and others Bension Varon, chief of mission, and others Evaluates the country's pragmatic and mission, and others Examines the government's liberaliza- dynamic approaches to economic Presents an integrated analysis of the tion policies designed to improve problems and its general commit- difficulties experienced by the Zairian resource allocation and emphasizes ment to an open market-oriented economy between 1975 and the first that these will need to be molded into economy, improved efficiency of half of 1979 and suggests that the a policy framework conducive to rapid domestic industry, and higher country needs to revamp its institu- development. living standards. tions and its system of incentives and January 1979. vili + 201 pages The Johns Hopkins University Press, adopt policies that will lay the founda- (including map, statistical appendix). 1975. 504 pages (including 5 appen- tion for a development pattern that Stock (o. RC-7902. $5.00 paperback. dixes, glossary, bibliography, statistical will render it less vulnerable to annex, maps, index). changes in the world economy. LC 74-24404. ISBlY 0-8018-1702-1, May 1980. v + 191 pages (including Yemen Arab Republic: $27.50 (£16.50) hardcover; map, annex, statistical appendix). Development of a Tradi- ISBN 0-8018-1715-3, $9.95 (£6.00) English and French. tional Economy paperback. Stock los. RC-8005-f, RC-8005-F. Otto Maiss, chief of mission, $5.00 paperback. and others . Yugoslavia: Self-Manage- Outlines the far-reaching changes in eote: The countries that are the the socioeconomic and political struc- ment Socialism and the subject of the World Bank Country ture of the Yemen Arab Republic since Challenges of Development Studies under this heading, and the 1962 revolution and discusses Martin SchrenK, Cyrus Ardalan, countries and regions that are major development issues of the late and Nawal A. El Tatawy mentioned in titles or summary 1970s and the 1980s. descriptions under other subject Describes major development issues headings, are listed in the Index at January 1979. 2, xxviii + 303 pages and the overall performance of the the end of the Catalog. (including 3 maps, 7 annexes, statisti- economy, showing that the new cal appendix, selected bibliography), economic framework of the 1970s strengthens decisionmaking at the Stock lo. RC-7901. $10.00 paperback. lowest microeconomic level and at the same time allows greater coor- dination of economic activity by People's Democratic extending self-management princi- Republic of Yemen: A Review pies to the macroeconomic level. of Economic and Social The Johns Hopkins University Press, Development 1979. 410 pages (including map, Shahid A. Chaudhry, chief of appendix, glossary, index). mission, and others LC 79-84316. ISBlN 0-8018-2263-7, Reviews the government's economic $27.50 (£17.50) hardcover; policies and the socialization of the 15BNf 0-8018-22 78-5, $12.95 (£6.75) economy between 1971 and 1978 paperback. and concludes that the absence of significant natural resources will inevitably influence the country's development, which must concentrate on solving urban/rural disparity, increasing productivity, and using manpower efficiently. March 1979. vi + 169 pages (including map, annex, statistical appendix). Stock [No. RC-7903. $5.00 paperback. WORLD BANK PUBLICATIONS ORDER FORM SEND TO: WORLD BANK PUBLICATIONS WORLD BANK PUBLICATIONS P.O. BOX 37525 or 66, AVENUE D'IENA WASHINGTON, D.C. 20013 75116 PARIS, FRANCE U.S.A. Name: Address: Stock or ISBN # Author, Title Qty. 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EF - 11- -4 2< ---1-- 7 1 1 - - - -1 e- - -s •1 * *. .fl g --r -4--- - - --- - -- - u ) --- ---- 1 -1 1"" -r The World Bank Headquarters European Office Tokyo Office 1818 H Street, N.N. 66, avenue d'lena Kokusai Building Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1 Marunouchi 3-chome Telephone: (202) 477-1234 Telephone: (1) 723-54.21 Chiyoda-ku, Tokyo 100, Japan Telex: WUI 64145 WORLDBANK Telex: 842-620628 Telephone: (03) 214-5001 RCA 248423 WORLDBK Telex: 781-26838 Cable Address: INTBAFRAD WASHINGTONDC ISSN 0253-2123/ISBN 0-8213-0157-8