Foreign Relations of the United States, 1977–1980, Volume XIII, China

247. Memorandum of Conversation¹

Washington, May 30, 1979, 11:30 a.m.

PARTICIPANTS

• Chinese:
• Vice Premier Kang Shien
• Minister of Petroleum Song Zhenming
• Ni Yaoli, Interpreter
• Ambassador Chai Zemin
• Peng Jinho, Counsellor for Commercial Affairs, PRC Embassy
• Zu Lizhang, Deputy Director, State Planning Commission
• Zhao Shenzhen, Deputy Director, Ministry of Petroleum
• Chen Dehe, Deputy Director, Ministry of Foreign Affairs
• Zhang Zai, Deputy Division Chief, Ministry of Foreign Affairs
• Zhou Wenzhang, Interpreter
• U.S.:
• Secretary Blumenthal
• Under Secretary Solomon
• Richard Chen, U.S. Interpreter
• Mike Oksenberg, NSC
• Stan Marcuss, Commerce
• Richard Fisher, Executive Assistant, Treasury
• Herbert Horowitz, Director, Office of East-West Economic Policy, Treasury

SUBJECT

• Discussion of Chinese Economy and U.S.–China Relations

In opening the discussion, Vice Premier Kang said his Government is still studying ways in which it can effectively cooperate with other countries on technology and trade in support of China’s modernization program. China’s economic and trade relations are expanding rapidly as China seeks to import more technology and equipment, and many questions arise related to finance. He said he would appreciate Secretary Blumenthal’s views on the best means to finance imports from the U.S. He noted problems China has had in respect to some of its purchases, particularly with Japan, in which case the Chinese signed agreements for equipment and construction but had neglected to examine all the problems of financing. Hence, he said, China is undergoing “many twists and turns.”

Secretary Blumenthal extended a warm welcome and noted the steady progress that has been made over the year in the development of our bilateral economic relations. He referred to Secretary Kreps’ visit to China, the signing of the private claims/assets agreement, initialling of the Trade Agreement, and Ambassador Strauss’ current visit to China as evidence of progress. The Secretary noted that he is expecting a visit from Minister of Finance Zhang Jingfu in the second and third weeks of July.

In response to the Vice Premier’s question about financing, the Secretary said that not all China’s financing of U.S. purchases need be financed in the United States. He noted that Japan made available to China a $2 billion credit which the Japanese Government has assured us is untied, which means that China can use the credit to buy goods from anywhere. Since the credit is primarily for development in the energy field where the U.S. industry is in a strong competitive position, he said we expect that some portion of China’s purchases with the credit will come from the United States.

Secretary Blumenthal said that MFN Treatment, which will follow the signing of the Trade Agreement and its approval by Congress, should provide a boost to bilateral trade. Also, after the Trade Agreement, we would hope that the legal obstacles to Export-Import Bank financing can be removed. Exim would be able to extend credit at rates of interests that are competitive with those from other countries. The precise credit terms, he noted, would depend on each individual project. In addition, he said, China will want to rely upon private credits from U.S. companies and banks. As a final point, the Secretary said, we are aware that China is interested in compensation-type agreements which are especially attractive in the energy and raw materials field. He said he understands China has had extensive discussions with U.S. companies for geophysical exploration and he assumes these arrangements involve investment by U.S. companies who are taking risks and who would be rewarded in product. He asked how close China and the U.S. companies are to such agreements.

Minister Song said that they hoped to complete some contracts very soon for underwater exploration, and in fact hope to have arrangements with all nine major U.S. companies. Under the arrangement contemplated, each of the nine would be allocated an area of exploration of thirty to fifty thousand square kilometers in the South China Sea. They would bear the cost of the exploration work but then would have an opportunity to bid for the development and production of those sections found particularly promising. The advantage of this approach, Song said, is that China does not have to finance the first phase of the project.

Secretary Blumenthal said he thought it wise for China to deal with each project on its own merits and in its own way, and in this regard he believed U.S. business can be very flexible. He again referred to the $2 billion Japanese credit which China can use anywhere and his hope that in view of the extensive U.S. expertise in the energy field the credit will be used to finance purchases from the United States. He said he had talked to the Japanese Minister of Finance who confirmed that the loan is untied.

The Vice Premier said he hoped that the U.S. would help China find ways to solve its financial problems. Secretary Blumenthal said one of the important questions to resolve is that of official claims, and specifically the outstanding Exim loans which are important to settle if the Export-Import Bank is to get approval from Congress to extend further credits to China. In response to Ambassador Chai’s question, the Secretary said he believes the outstanding principal is $26.4 million. He explained that after World War II the Export-Import Bank extended credits to China; as for equipment financed by those loans which was taken to Taiwan the PRC obviously has no responsibility; but some of the equipment financed by those loans remained in China and under U.S. law, the successor government is expected to assume responsibility for repayment. Secretary Blumenthal said he hopes to discuss this issue with the Minister of Finance during his visit.

Mr. Blumenthal referred to another question the Vice Premier had raised regarding a computer (IBM 1033), and his promise to look into the problem. He said he understands that Mr. Press wrote a letter regarding the possibilities of leasing if certain conditions are met, e.g., operation by a U.S. technician. He said he understands the U.S. company has not yet applied but if it does he can assure the Vice Premier that the company’s application will be given expeditious consideration. Minister Song said it is possible the request will be submitted soon and the Vice Premier commented that if the U.S. considers the matter feasible, Western Geophysics will want to proceed. Minister Song noted that Secretary Schlesinger has also offered to be helpful.

Secretary Blumenthal said he understands China is reconsidering the planned pace of its economic development and asked whether this has led to any changes in Chinese attitudes toward import of foreign equipment and technology or changes in Chinese priorities.

The Vice Premier said China is firm in its policy of pursuing the “four modernizations.” He said China achieved satisfactory results in economic development in 1977–78. For example, production reached some 300 million tons of grain, 600 million tons of coal, 100 million tons of oil and 31 million tons of iron and steel, and China also achieved a surplus in government revenues. (Mr. Blumenthal said, “Congratulations, you have a good Secretary of the Treasury. I will take lessons from him.”) Despite this solid ground for modernization, the Vice Premier said, we faced problems of balance, for example between industry and agriculture. China has a large population and while grain production is impressive, the supply is still limited. Thus, he said, we think it necessary to shift more of our effort to agriculture. We also feel it is necessary to speed up development of light industry which is important both to improve the livelihood of the people and to boost China’s ability to export; and this requires some shift from heavy toward light industry. In heavy industry, the Vice Premier said, we must be selective and are putting our emphasis on the development of energy. We cannot do everything at once, the Vice Premier said; to try to do so, would among other things, create serious problems of financing. Some of our specific targets have to be changed, for example the iron and steel target of 60 million tons by 1985 will have to be lowered. In response to Secretary Blumenthal’s question about an oil target, the Vice Premier said our objective is to increase production as much and as soon as possible and this will depend on what we find. Secretary Blumenthal asked if they could project some goal based upon existing reserves. Minister Song said China does not envision any substantial increase in production on the basis of existing reserves. In response to Secretary Blumenthal’s question about coal, the Vice Premier said China has rich deposits and must speed up production. He said China is interested in what U.S. companies have to offer in this field.

At lunch, the Vice Premier once again emphasized that the principle of introducing foreign technology has not changed as a result of China’s current economic reassessment. He said only the way China is going about it is changed; specifically, China is not attempting to do everything at one time. Secretary Blumenthal said that in one of his discussions in Beijing he suggested that China needs to try a little capitalism. He said that over the years he has seen many countries try to deal with the problems of modernization, and that among the most successful have been several in Asia, namely, Japan, South Korea, and Taiwan. In each case, he said, the success was largely attributable to reliance on free operation of the market, and the efficient use of capital and incentives. He asked if developments in this direction are possible in China. The Vice Premier said that while looking at various forms of management, their approach is to maintain the framework of a socialist and planned economy. He said that one of China’s economic problems is too much concentration of power at the center and too much paperwork; not enough play and initiative is left to local authorities and to factory managers, and not enough incentive for them to effect improvements in production and quality of product.

In response to Mr. Solomon’s question as to what is China’s new steel target for 1985, the Vice Premier said that the new goal is not yet final. He said that existing capacity is about forty million tons and that China now produces a little over thirty million tons. He said that while there may be some slowing down of the construction of large new projects, such as the Baoshan project in Shanghai, that the projects would [not?] be abandoned. In response to another question, he said that at the initial stages of Baoshan, domestic iron ore will be supplemented by imports from Australia and Brazil. Meanwhile, China will proceed with expansion of its own iron ore capacity.

Mr. Blumenthal asked if there is any opposition in China to imports. The Vice Premier emphasized that China is of one mind on this matter. He noted that this is sometimes contradicted by big character posters put up on “democracy wall.” Within certain limits, he said, almost anything could be put up. Mao’s teachings, he said, emphasize self-reliance but also permit learning from abroad. The “gang of four” simply wanted to close the country.

Mr. Oksenberg asked if China has a long-term manpower plan. The Vice Premier said the problem of population and future employment is very serious. As an economy modernizes, there will be greater automation and a lower need for manpower, but he thought that China will have one part of its industrial structure modernized and thus require less manpower, and that other parts of the economy will remain less automated and still heavily reliant on manual operations.

Herbert E. Horowitz

1. Source: Carter Library, National Security Affairs, Staff Material, Far East, Oksenberg Subject File, Box 47, Meetings: 5/79. Confidential. Drafted by Horowitz. The meeting and working lunch were held in the Department of the Treasury.