Memorandum, 'Re: Information Related to China'

Strictly confidential!

Ministry of the Interior

General Directorate III/II

Re: Information related to China

Comrade János Bogye, police major general

deputy head of general directorate

head of Directorate III/I of the Ministry of Interior

Budapest

Zhu Rongji, deputy chairman of the Chinese State Planning Commission, shared the following information with a delegation of the [Hungarian] Newspaper Publishing Company during their visit in China:

The Chinese economic leader emphasized that Hungarian and Chinese cooperation in the economic and technical fields had progressed well in his judgment. He added that this development served as great contentment to China. He made reference to Comrade Marjai's visit to Beijing last year, when Zhao Ziyang Chinese Premier also talked highly of the Hungarian experiences. The Chinese Premier was already interested to learn about the Hungarian reforms, when he was the Party Secretary of Sichuan, and the Chinese economic leadership adopted important elements from the Hungarian solutions. "Our leaders, including our Premier, highly appreciate the results Hungary has achieved."

Zhu Rongji stressed that Hungarian reforms went back to a substantially longer past than Chinese reforms. Reforms introduced in agriculture in China already yielded unquestionable results, these reforms are definitely successful. However, the outcome of the urban reforms introduced just last year could only be evaluated in two or three years' time. "The measures that we are taking in the framework of reforms have fundamentally good effects. This is reflected by the rapid, perhaps even too fast growth in industrial production and by the improved standards of living. Signs of overheating began to appear already in the fourth quarter last year. The rate of industrial production growth is around 22 per cent. Planned economy has been losing controls, but the new management system is not sufficiently developed. The volume of investments has been oversized and credit outflow is higher than desirable. Perceiving these problems, we have made efforts to keep back growth. Western newspapers instantly published speculations about the opening processes being slowed down. This is not the case, however, stronger controls have been put in place."^[1]

The Chinese economic leader explained that they were extremely cautious when the reforms were introduced. First of all because the population would be sensitively affected by rising prices, which constituted one of the most vulnerable points in the reform processes. The Chinese expert quoted Comrade Marjai's observation by saying that the reforms would bring a golden age in price reforms. Such price reforms would definitely take place in China. It was already implemented in agriculture with changes effected both in purchase prices and retail prices. No significant changes were made in industrial prices although some minor adjustments had been initiated. It was all clear that the reforms had led to price increases; prices had already gone up by 7 per cent, which was still not unbearable. Consumer price level might rise by 9 per cent this year. There was great unevenness in the price increases, vegetable prices had risen substantially and first of all in the vicinity of cities. They intend to introduce price controls on vegetables as an annual increase of 15 per cent in prices is judged unbearable. Experiences in Tianjin proved that the effects of market mechanisms had to be combined with administrative measures in order to reduce black market activities and speculations.

An increase in the price of raw materials would pose a problem in industry as great many companies would simply go bankrupt or produce a loss. This is the reason why they intend to proceed with a price reform slowly, step by step. As a way of experiment, the wages of workers will depend on the efficiency of the financial management of the company they work at. A substantial rise in the salaries of teachers and staff working in the administrative apparatus was introduced in July this year. A rise of 0.7 per cent in the wages of workers is allowed provided that the company increases its profit by one per cent. Not even the rough outlines of reforming wages have been drawn up yet.

Talking about Chinese-Hungarian economic, scientific and technical collaboration, Zhu Rongji stated that cooperation between the two countries was good. China placed great emphasis on Hungarian participation in Chinese reconstruction activities. He reminded that 7 areas for cooperation had been defined, and additional five areas had been taken into consideration during his visit to Hungary in 1984. Hungary could assist China with their reconstruction, for instance, by contributing to the modernization Chinese bus manufacturing. Disputes over prices may occur, but these issues are not political in their character.

In response to the question what the common features of the two reform policies were, the Chinese economic leader stated that China and Hungary both strived to build socialism that was adapted to their national characteristics. "Some Western countries suggest that we want capitalism, but that is out of the question."

"We intend to develop a commodity economy that is regulated by market forces. Previously we thought that everything could be planned for in a centrally planned economy. We have come to a different opinion by now. It is not a command economy system that we need but economic planning that calculates with market forces.

Touching upon the topic of Special Economic Zones, the Chinese economic leader stressed that an experiment was going on in these places and they had not gained sufficient experience to evaluate yet. "We have just started the initiative in Shenzen, and obviously it isn't running smoothly. Newspapers published in Hong Kong only give news about what is going wrong in the Special Economic Zones. We had the hope that these zones would attract an abundance of foreign capital, but instead mainly domestic capital is accumulated here. We had hopes that these zones would focus on export, but our hopes regarding exports have not been fulfilled so far."

The economic leader added that they intended to improve the methods of financial management at company level. They had the intention to wind up inefficient companies and for this end bankruptcy proceedings had been introduce although they were only used as a warning  so far. Some of the factory leaders in China too were elected, and there was a general effort to spread democratic methods. However, this transformation was only going through an initial phase in the economy. "Earlier we fully adopted the Soviet economic model, which exerts significant influence in China even today, and the problems that were recognized in the Soviet Union have emerged in China as well. I feel that reforms are seriously being weighed in Moscow as well, and the masses of people over there also feel that changes are necessary."^[2] "If we close our doors, we are unable to develop. On the other hand, if we open our doors, it is not only good things that will gain entrance. We must be aware of this."

"Unhealthy things may as well spread, most of all in the field of ideology," he added. At the same time, Zhu Rongji stressed their adherence to the four fundamental principles: progress to be made on the road to socialism; dictatorship of the proletariat; the leading role of the party; Marxist and Leninist teachings with Mao's theoretical contribution added.

Zhu Rongji made it clear that the policy of opening up did not only mean opening the economy to capitalist countries, but also rapprochement to socialist and developing countries, and advancing already existing relations.

Note: Source stayed in China from 26 /08/ to 08 / 09/ 1985.

Information: unchecked

Validity: 26/08/1985

Source: Directorate III/II-3, report 3/5-426/85.09.20

Forwarded for measures: -

for information: General Directorate III/I

Budapest, 30 September

Dr. Miklós Rédey police major general

deputy head of general directorate

Prepared in 1 copy

Copy 1 for Directorate III/I

^[1]This section is obviously a quotation from Zhu Rongji but it was not put between quotation marks in the original report.

^[2]This section is not put between quotation marks, but from the use of personal pronouns it should be marked as a qoutation.