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April 16,1976

W riting on the Wall
The wall posters are up again in
Peking, and China watchers are
trying to decipher what all
this means for relationships be­
tween the world's most populous
nation and the rest of the world.
Earlier periods of domestic turmoil
created serious economic difficult­
ies for the People’s Republic of
China, including a severe depres­
sion after the Great Leap Forward of
the late 1950’s and a recession at the
time of the Cultural Revolution in
the late 1960’s. The present succes­
sion crisis, with the “ Capitalist
Roaders” on the defensive, raises
the question of whether the strong
economic advance of the past
several years could be stymied
again by ideological factors.
The magnitude of any potential
setback might be hard to quantify,
especially in a land where econom­
ic statistics are practically state se­
crets. Nonetheless, the information
that is available suggests that the
Chinese economy has been able to
overcome earlier reverses and to
record a relatively strong growth
trend over the past two decades.
During that period, farm produc­
tion has grown about 2 percent
annually, in line with population
growth, while industrial production
has risen about 9 percent annually.
Trade and growth

With a GNP in the neighborhood of
$250 billion, China thus ranks
among the top half-dozen of the
world’s largest economies. GNP
growth has provided a substantial
margin over subsistence for use in




building up the nation's economic
and military capabilities. The agri­
cultural sector, supplemented by
food imports, has fed an expanding
population now numbered at about
900 million. The industrial sector,
from a very small base, has pro­
vided rapid increases in capacity
and output of industrial materials,
machinery and military equipment.
Finally, the foreign-trade sector has
helped meet the nation’s crucial
needs for fertilizer, grain, industrial
materials, and advanced equipment.
The key to future trends may first
become visible in China's foreigntrade statistics. When the techno­
crats held the upper hand during
the strong economic advance of the
early 1970’s, they explicitly recog­
nized that continuation of rapid
economic growth would require
accelerated technological progress
and a greater international-trade
orientation. The question today is
whether an attempt will be made to
return to the policy of rigid self­
reliance—import minimization—
which characterized much of the
regime’s earlier days in power.
Boom of the '70s

The value of China’s foreign trade
did not rise above the 1959 peak
until 1971. Then, because of re­
newed Chinese interest in foreign
goods, but also because of world­
wide inflation and currency revalu­
ation, the dollar value of foreign
trade (exports plus imports) surged
from $4.7 billion in 1971 to an esti­
mated $14.9 billion in 1975. In the
process, China ran up substantial
(continued on page 2)

Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.

trade deficits—reaching about $1.0
billion in 1974—such as would have
been unheard of in earlier days.
Imports of machinery and other
capital goods have played a crucial
role in China's industrial develop­
ment, especially in the 1950's and
again in the early 1970's. Similarly,
imports of foodstuffs (mostly grain)
have made an important contribu­
tion to the urban food supply ever
since the early 1960's, thereby eas­
ing the production burdens of a
hard-pressed peasantry and the dis­
tribution burdens of an overloaded
transportation system. In this
scheme of things, planners viewed
exports primarily as a means of
earning foreign exchange with
which to purchase growth­
supporting imports.

ent on raw-material imports to fuel
its modern industrial economy,
while China's economic planners
place a high priority on importing
the types of machinery and indus­
trial goods which Japan is capable
of supplying. Western European
countries provide similar assist­
ance; for example, the Germans are
now building a major steel plant on
the Yangtze River at Wuhan, along­
side a Japanese plant of like design.
Hong Kong is another important
trading partner, supplying a large
share of China's foreign exchange
needs because of substantial pur­
chases of food and textiles.
Boom for the U.S.?

The trade (and political) orientation
of the 1950's, described as a “ lean to
one side" policy, channeled twothirds or more of China's trade to
the Soviet Union and other Com­
munist nations. That policy col­
lapsed in the early 1960's at the time
of the Sino-Soviet split, which
brought to a virtual halt an exten­
sive program of turnkey (complete
plant) projects in which thousands
of Soviet technicians had been
closely involved. Since then, the
PRC has conducted as much as
four-fifths of its trade with Western
Europe, Japan and other Asia.

The U.S. has come late to the mod­
ern China trade, although trading
relationships began in 1784 and
thrived throughout the clipper-ship
era of the 19th century. In this
century, trade between the two
nations slumped after the 1920's,
except for a brief flurry during the
post-World War II reconstruction
period, and then stopped com­
pletely for two decades because of
the enmity engendered by the
Korean War. Political normaliza­
tion, Chinese food shortages and
worldwide inflation suddenly
boosted total U.S.-PRC trade from
$96 million in 1972 to $804 million in
1973 and $935 million in 1974, but
the trade totals just as suddenly fell
below $450 million in 1975.

Japan alone accounts for about 20
percent of the PRC's total trade,
because of geographic proximity
and (especially) economic comple­
mentarity. Japan is heavily depend-

During the 1973-74 boom, China
found that its traditional grain sup­
pliers (Canada and Australia) could
not boost exports by the 2-4 million
tons required, so it turned to the




U.S. But then, in 1975, it slashed its
purchases from this country be­
cause of improved crop prospects
as well as dissatisfaction with the
quality of American wheat and corn
shipments. In the meantime, the
U.S. managed to gain no more than
a 3-5 percent share of China's
industrial-goods imports, at least in
part because of Japan’s competitive
edge in this market. (Still, the U.S.
has recorded substantial sales of jet
transports, ammonia plants, tele­
communications facilities and
heavy equipment.) Another damp­
ening factor was the heavy U.S.PRC trade imbalance, brought
about by China’s limited ability to
market her products in this country.
The food, textiles and other con­
sumer products which are China’s
stock in trade have little competi­
tive advantage in our markets—and
China’s world-famed firecrackers
fail to meet current U.S. safety
standards.
The whole issue is clouded by the
lack of formal diplomatic relations
between the two countries, which
limits the ability to settle a number
of outstanding trade issues. Trade
probably won’t expand as long as
credits are unavailable to cover the
present trade imbalance, and yet
the recent Trade Act precludes ExIm Bank credits to countries with
which we have no inter­
governmental trade relations. (For
that matter, China traditionally
avoids incurring large external
debts.) Similar considerations apply
to the failure to settle pre-Korean
War claims—which involve some
$197 million in U.S. private claims
3




against China and $77 million in
PRC assets frozen in this country—
and to the failure to grant mostfavored-nation status to Chinese
exports.
Self-sufficient?

What of the future? According to
the Department of Commerce’s
William Clarke and Martha Avery,
“ Of the principal nations of the
world, probably none is closer to
self-sufficiency than China. At the
same time, Chinese ideology cou­
pled with the planning of a central­
ly controlled economy and a delib­
erate government policy of being
highly self-reliant injects a political
element into commercial relation­
ships to a degree seen few places
elsewhere in the world."
We might add that there are several
unsettling elements in this highly
structured equation. One such fac­
tor is petroleum. China has gone
beyond self-sufficiency in that cru­
cial commodity and is already ex­
porting oil to Japan—and by some
projections, could attain a massive
trade surplus from oil exports with­
in the next decade. If that produc­
tion materializes, the trading rela­
tions of China, the OPEC, and the
industrialized world could change
materially. The other unsettling fac­
tor is the present succession crisis,
which could undermine the recent
drive for economic growth and
thereby destabilize both domestic
and foreign-trade policy. But what­
ever the outcome, it will probably
become apparent first in the trade
statistics, even before it shows up in
the ever-present wall posters.
William Burke

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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks

Amount
Outstanding
3/31/76

+
+
+

Loans (gross, adjusted) and investments*
Loans (gross, adjusted)—total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other securities
Deposits (less cash items)— total*
Demand deposits (adjusted)
U.S. Government deposits
Time deposits—total*
States and political subdivisions
Savings deposits
Other time deposits^
Large negotiable C D ’s

87,166
64,817
1,072
23,085
19,516
10,678
9,717
12,632
88,362
24,396
223
62,005
6,187
25,593
27,687
12,556

Weekly Averages
of Daily Figures

Week ended
3/31/76

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free(+)/Net borrowed (-)
Federal Funds—Seven Large Banks
Interbank Federal fund transactions
Net purchases (+)/Net sales (-)
Transactions of U.S. security dealers
Net loans (+)/Net borrowings (-)

Change
from
3/24/76

-

+
+
-

+
+
-

+
+
+
-

-

121
172
197
17
10
45
10
61
1,229
407
19
339
43
376
146
139

Change from
year ago
Dollar
Percent
+ 1,302
913
720
997
214
+ 819
+ 2,156
+
59
+ 3,346
+ 943
44
+ 2,224
416
+ 5,979
2,208
- 3,984

+
+
+
+
+
+
+
+
-

-

Week ended
3/24/76

1.52
1.39
40.18
4.14
1.08
8.31
28.51
0.47
3.94
4.02
16.48
3.72
6.30
30.48
7.39
24.09

Comparable
year-ago period

+

+

599

+ 1,287

+ 1,770

+

194

+

+ 1,081

+

75
2
73

70
0
70

73
1
72

25

+

inclu d es items not shown separately. ^Individuals, partnerships and corporations.

Editorial comments may be addressed to the editor (William Burke) or to the author. . . .Information
on this and other publications can be obtained by calling or writing the Public Information Section,
Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184.




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