faster than that included in our "pessimistic" forecast in table 1. (that is, the problems they will encounter in achieving rapid rates of growth in agricultural production and the rapid rates of growth in the domestic demand for that output due to the rapid expansion of industrial production, the industrial labor force, and the desired increase in the standard of living). Thus, our estimate for the potential growth in exports is based on the relatively stable relationship established between the rate of growth in exports and the rate of growth in domestic agricultural and industrial production over the past 28 years. Furthermore, our simplified numerical illustration of why the economic plans and policies of the new leadership can be expected to require sizable borrowing abroad over the next 7 years, accepts Hua's "optimistic" forecast for increases in agricultural production and adjusts our estimate for the rate of increase in exports upward by over 50 percent.

64

63

Nonetheless, the stable relationship of the past between exports and domestic agricultural and industrial production could be changed by a significant shift in favor of greater exports of China's raw materials, such as petroleum. There is reason for being cautious in this regard, however. Given the economic plans and policies of the new leadership, the domestic demand for these raw materials should rise relatively rapidly over the next 7 years. This is especially true for oil, inasmuch as the Chinese undoubtedly will continue the shift to a greater reliance on the use of oil, diesel fuel, and gasoline as a source of energy. Because of this increasing demand, one estimate holds that even under the most favorable assumptions, China will be able to export annually over the next decade or so no more than one-tenth of the oil exported by OPEC in 1974; according to that study, a more reasonable estimate would be about one-twentieth.65 In fact, given the magnitudes of China's industrialization program and the emphasis given to the development of an extensive and well-developed transportation network, China's reliance on exports of oil as a major source of foreign exchange could even diminish over the next 7 years as domestic demand overtook the available supply.

66

On the supply side, growth rates of 20 to 25 percent in China's oil industry will be very difficult to maintain over the next 7 years. The attempt to tap China's oil reserves, both onshore and offshore, to maintain these past rates of growth will require drilling technology and equipment and the means for transporting the petroleum from the drill head to either the domestic user or the ocean ports (which also require facilities for loading oil tankers) which the Chinese have not yet acquired. Even if the technology, equipment, and skilled workers were to be obtained from abroad, adding to the demand for imports, these items are in scarce supply and would involve high costs, considerable timelags, and possibly the direct participation of foreign companies in China's development program.

"This estimate of China's export potential is consistent with the estimates of Hedija Kravalis in "China's Export Potential," in this volume.

Between 1970 and 1974, oil increased its share in China's total energy supply from 14 to 22 percent. CIA, "China: Energy Balance Projections," A(ER)75-75, November 1975.

"See Vaclav Smil, "Energy Production," and Kung-ping Wang, "Mineral Output and Productivity," in this volume.

Despite these words of caution, however, the exploitation of China's oil resources does provide the Chinese with an excellent export commodity-liquid gold-that is in great demand in those very countries that can supply the Chinese with the imports they will need in the next 7 years, that is, Japan and Western Europe. On the other hand, although these potential exports of raw materials may help alleviate some of China's balance-of-payment problems, they will not provide the magnitude of foreign exchange earnings required for financing the import surplus implied by the economic plans and policies of the new leadership.

67

One final source for financing the projected import surplus, of course, is the continuation of the present practice of relying on short-term commercial (5 years or less) credit for individual import transactions, that is, a certain amount paid when the imports are received by China and the rest of the payments spread out periodically over the next few years. This source, however, can only be a temporary means for financing the projected growth in the gap between current imports and current exports implied in the economic plans and policies of the new leadership. In other words, the short-term debt would soon accumulate to the point where current exports could not cover the repayments scheduled by the debts used to finance imports in previous years and the Chinese would have to engage in long-term foreign borrowing for that purpose.

We cannot, of course, rule out the use of each of the above sources combined to finance a growing Chinese import surplus or the limitation of that import growth to the level made possible by these sources. Quite simply, actual events may see the Chinese leadership adapt their economic plans and policies in light of the constraints imposed by domestic resource and foreign exchange availability; constraints presently dictated by their policy of self-reliance in regard to foreign borrowing. Such a policy would merely mean the actual evolution of the economy over the next 7 years would be closer to our "pessimistic" forecast in table 1 (a forecast based on the assumption of a policy of self-reliance in regard to foreign borrowing) than to the forecast presented in Hua's speech. On the other hand, if the new leadership does attempt to realize its economic plans and policies, that is, the results presented as Hua's "optimistic" forecast in table 1, over the next 7 years, we conclude the only possible way those plans and policies can be realized is by means of China's obtaining long-term foreign loans.

The Choice of Trading Partners

While no attempt is made here to estimate the magnitude of China's potential long-term borrowing from abroad, those loans undoubtedly will be tied to the financing of particular large-scale import transactions negotiated with groups of Western businessmen or countries. These large-scale import transactions will be an important feature of the projected rapid growth of imports, that is, those imports specifically obtained for the purpose of achieving the new leaderships plans for rapidly increasing China's technological capabilities and

67 For a detailed description of the short-term financing used to finance China's imports, see David L. Denny,"International Finance in the People's Republic of China," in previous Joint Economic Committee compendium of papers on China's economy, "China: A Reassessment of the Economy," 1975.

developing China's industrial capacity so as to catch up with the West by the end of the century. Thus, the source of these long-term loans will be determined by the trading partners the Chinese rely upon for the purchase of these imports

68

The Soviet Union was a major supplier of these producers goods during the 1950's, when China was rehabilitating and expanding basic industries which did not require the most sophisticated and advanced technology. Now and in the future, the Chinese will be able to produce these producers goods domestically; requiring instead producers goods which embody more advanced technology. The socialist countries, although able to meet some of China's technological needs in this regard, are themselves currently seeking imports of high-technology producers goods in the West. The comparative advantages of Western suppliers is even greater in China's import needs for current inputs in agricultural production, that is chemical fertilizer, and for agricultural products.

Transport costs for trade with the socialist countries are also relatively high, especially when compared with the transport costs for trade with Japan, China's largest trading partner. In addition, China's export commodities probably accommodate Japan's needs more than they do the needs of any other industralized country. As for China's import needs, Japan's export potential, current economic conditions, continuing accumulation of foreign exchange reserves, and the facility with which the Japanese transferred official recognition from the Republic of China to the People's Republic of China will all serve to insure that Japan will remain the major supplier of the technology, producers goods, and long-term loans required for the implementation of the new Chinese leaderships economic plans and policies.69

Although Japan's dominance of China's import trade should continue and even increase over the next 7 years, the Chinese also can be expected to follow a policy of diversifying their foreign trade ties so as to avoid exclusive dependence on any single country or group of countries. This will lead China to develop trade ties with all countries and areas: the socialist countries (including the Soviet Union), the industrailized countries of North America and Western Europe, agricultural surplus countries in South America and Southeast Asia, and raw material suppliers among the ranks of the underdeveloped countries. This policy will also help to insure some role for the United States in China's growing import trade.

As far as Sino-American trade ties over the next 7 years are concerned however, the United States will probably remain-as at the present time the source of particular types of advanced technology and producers goods the Chinese cannot obtain from U.S. licensed firms in

"An example of this phenonemon is the long-term trade agreement signed by the President of the JapanChina Economic Association (Japan) and China's Vice Minister for Foreign Trade in February. The agreement calls for 10 billion U.S. dollars in exports by each country to the other over the next 5 years; Japan to export 7 to 8 billion U.S. dollars of plants and technology and 2 to 3 billion U.S. dollars in construction materials, China to export 47 million tons of oil, 5 million tons of coking coal for steelmaking, and 3.5 to 4 million tons of steaming coal for power generation. Thus, basically the agreement would appear to be a barter agreement, but the Japanese exports of plant and technology will be made on a deferred payment bases. These are not to be paid for on the basis of long-term loans, presumably out of deference to China's ideological opposition to long-term borrowing from abroad. Nonetheless, at the same time, the Japanese are said to have adopted two means for providing what amounts to long-term loans for financing China's growing imports from Japan: making sizable foreign-currency deposits with the Bank of China which the Chinese can utilized to pay for Japanese exports and the extension of credit by Japanese banking system and ImportExport Bank directly to Japanese exporters engaged in export trade with China.

"See footnote, 68, above.

third countries and residual supplies of agricultural products during peak periods of Chinese demand for these products. Several major obstacles will prevent the United States from playing a major role, that is, compared with Japan and Western Europe, in the projected rapid growth in Chinese imports over the next 7 years. Foremost among these obstacles-mostly political-are the following: (a) Considerations which make it very difficult for the United Statesunlike any other major industrial country-to grant de jure recognition to the People's Republic of China and withdraw that recognition from the Republic of China; (b) considerations which have made it difficult for the United States to settle the issue of Chinese frozen assets in this country and American claims on assets and debts in China; (c) the considerations which have made it difficult for the United States to grant "most-favored-nation" tariff rights to Chinese exports in the normalization of commercial relations; (d) the system of legal controls in the United States on commercial trade with China; and (e) the difficulty which can be expected in any future attempt to remove U.S. controls on the extension of long-term credit for financing exports to China.70 None of these "difficulties" are insurmountable, but little or no progress has been made in solving them since the early 1970's and, as long as they remain, the United States will undoubtedly continue to follow Japan and then Western Europe as the major contributors to China's rapidly growing import trade over the next 7 years.

CONCLUSION

The discussion and arguments in this paper, as in a good many of the other papers in this volume, has emphasized the serious economic problems the new leadership faces in its attempt to modernize China's economy, and reach the front ranks of the industrialized world by the end of this century. Other papers in this volume present analyses and conclusions which are significantly more optimistic about China's economic future. Even those which emphasize the economic problems in China's future, such as this paper, also include arguments which would lead to a rather favorable interpretation of China's past record of economic development and possibilities for continued growth in the future, although nowhere near as optimistic as the prospects held forth in Hua's speech to the Fifth National People's Congress.

70 For a detailed discussion of these considerations which lead to these difficulties and of the difficulties which serve as obstacles to greater Sino-American trade, see Eugene A. Theroux, "Legal and Practical Problems in the China Trade," in the previous Joint Economic Committee compendium of papers on China's economy, "China: A Reassessment of the Economy," 1975, and Martha Avery and William Clark, "Sino-American Commercial Relations" and Stanley Lubman, "Legal Aspects of PRC Trade," in this volume. Two papers in this volume attempt to estimate the effect the granting of most-favored-nation tariff privileges to China's exports would have on Sino-American trade; see James Kilpatrick and Phillip Lincoln, "MFN and the China Trade," and Helen Raffel, "Tariff Restrictions and PRC Export Potential," in this volume. It should be noted that most of the papers in this volume deal with topics central to the economic problems and potential of China's economic development as would be viewed from within China itself; the papers in this volume referred to in this footnote are included because of the great concern with these problems of Sino-American trade by the American public and Government and these latter problems, especially MFN, are not nearly as crucial in determining China's economic future as they are in determining the future political relations between these two countries. For a discussion of the problems which are preventing the introduction of the necessary means of providing long-term financing of U.S. exports to China, see Frank Ching, "Rough Going Forecast for U.S. Proposals To Allow China Loans," The Asian Wall Street Journal, April 14, 1978.

For example, all of the papers in this volume recognize the record of positive rates of growth in both agriculture and industry in China's economic development over the past 28 years, which have created a significant economic base for the new leadership to build on in their attempt to modernize China's economy. More important, all recognize the tremendous potential for future growth and even the more pessimistic of the papers that follow believe the new leadership's economic plans and policies will achieve a considerable degree of success; that is, further increases in GNP per capita. Perhaps most important of all is that these economic plans and policies of the new leadership indicate domestic economic rationality and stability and a far greater reliance on normal commercial relations with the industrialized countries of the non-Communist world than was true in the past.