Secret Telegram from Jász, 'On the Relations between China and the Socialist Countries in 1986'

Place of mission: Beijing

DECIPHERED DOCUMENT!

Strictly confidential!

(To be returned within 5 days!)

Receipt of telegram: at 09:40 on 15/12/1986

Sent: at 10:30 on 15/12

1986 marked a year when general improvement was achieved in country-to-country relations between China and the socialist countries, but progress was not even and failed to bring a breakthrough or create new quality in relations.

Political relations:

Relations have been raised to a higher level. Country to country relations between China and the socialist countries in Europe have been normalized.

Visits were exchanged on a deputy prime minister level between all the countries, long term (five-year) economic and trade agreements were signed. Visits by members of government and heads of the highest authorities have become regular. All the states concerned have expressed their willingness to further develop relations, and arrange a meeting of premiers. Zhao Ziyang had been officially invited to all the six^[1] Warsaw Pact countries concerned. He declined the invitation by the Soviet Union on reasons that a visit would be "premature". It was indicated that he would, in principle, fulfill all 5 invitations in 1987, but recent information suggests that he is likely to limit his visits to three capitals only. We have no knowledge of a final decision on the matter. Country to country normalization is characterized by the fact that essentially all initiatives, or for the most part, have been taken by the Chinese. Another feature is the delay in the development of relations with the Soviet Union, which is 1-1.5 steps behind the rest. China's commitment to the "three respects" principle constitutes one of the crucial factors that has led to the accelerating speed with which political relations are being built. The first of the "three respects" is the mutual respect for the right to shape foreign and domestic policies autonomously, which has been adopted as a fundamental principle that applies to country to country and party to party relations. The second principle is relatively less important by saying that development should progress at a pace that is desirable for the respective countries. The third principle says that normalization of relations with China is not aimed against relations maintained with the Soviet Union, which is a step forward in as much as it states that:

The policy of the allies led by the Soviet Union is not aimed against China, and China no longer regards the Soviet Union to be the "number one enemy", thus maintaining a good relationship with the Soviet Union will not be considered in itself as an act against China. At the same time it is underlined that:

Full political normalization does not apply to the Soviet Union at the moment, it is offered only to its allies. However, it would have been a mistake to reject these principles, and wait for a complete breakthrough. It is a lot more likely that opening gradually will provide more opportunities for our countries to exert influence on Chinese leaders and to acquire further positions, in addition to existing ones, in a widening field. This was the intention behind Honecker's visit this year as well as behind the declared normalization of relations between the CCP and the SED. The highest level Chinese-Polish relations were established by Jaruzelski's visit although party to party normalization was not included in the agenda. China expects that the first steps in this direction will be taken in 1987. Similar outcome is to be expected of Zhivkov's visit scheduled for next year in terms of relations between the Bulgarian party and the CCP. Work relationship has so far been established between the Czechoslovakian and Hungarian party apparatuses. China has examined opportunities for top level visits. They seem to have liked to arrange them before the 13th Congress. Regarding Yugoslavia and Romania, political relations have stayed unchanged, but their relative value has decreased. Opportunities for opening up to Albania have intensively been sought, but poor response has been received. "Small steps" are being taken by in the case of Mongolia and Cuba, there are no signs of efforts to raise the level of relations. Vietnamese attempts at opening up have received no real response. China will not make a move before the 6th Congress, the outcome of which China tries to influence by exerting increasing pressure. Opening up to Laos is important in this respect. Chinese import from small socialist countries in Europe is expected to drop in 1987 as a consequence of China's domestic economic difficulties, and specifically the substantial general restrictions imposed on imports. This will most powerfully affect Hungary, where other reasons are also at play.

Concrete examples:

There will be no imports of motor vehicles. Attempts will be made to reduce general difficulties by the inclusion of new import items, but the decline in trade is inevitable. China in general will strive to reduce the proportion of machinery imports, and increase imports of materials.

Agreements signed so far and expected trading:

Soviet Union: 4.75 billion CHF for 1986

This development trend will be unbroken, and trading planned around 30 billion in 5 years can be achieved. There is also a political basis. The following elements have been considered as new and positive in Gorbachev's speech delivered in Vladivostok:

A/ Announcement of willingness to withdraw troops from Mongolia.

B/ Withdrawal of the 6th regiment from Afghanistan.

C/ Common border along the main channel of rivers is acceptable.

In response to the above, China agreed to resume border negotiations in February 1987. However, the speech means no progress regarding Cambodia, which is a crucial issue. Talks on political normalization can commence provided that the USSR takes actual steps in order that Vietnamese troops are withdrawn from Cambodia or makes a serious commitment to take such steps.

To be continued.

-352- Jász

Continued

A ten per cent increase in trade was agreed with the GDR. However, fulfillment is doubtful, if not improbable. For example the five-year agreement sets imports of motor cars at ten thousand units annually. The import of 8 thousand cars has been planned for 1987, but only a total of 2000 units will be contracted for.

Poland: trading will definitely decline, but the drop is expected to be smaller than in the case of Hungary.

Romania: the agreement forecasts a turnover of 900 million in trading for 1986, but it will only reach 800 million, and the current level of fulfillment is expected for 1987 as well.

Yugoslavia: a turnover of 200 million USD in trading is expected for this year and for next year as well.

Albania: turnover is increasing. It was 6 million USD last year, 29 million is expected for this year, and 30 per cent increase is expected in 1987.

Czechoslovakia: accurate data is unavailable, the same level is to be expected.

Bulgaria: the five-year agreement states an annual turnover of 200 million CHF. Fulfillment will be around 60 per cent this year. One percent increase is prescribed in the agreement for next year.

Hungarian-Chinese political relations have undergone unbroken and steady development for the last three or four years. The policy objectives set in the relevant resolution of the Political Committee have practically been attained, country-to-country relations have completely been restored with the exception of cooperation between ministries for defense and interior affairs. However, development is still at an initial stage in almost all areas, and thus has yielded few practical results so far.

Taking up party to party contacts, the pace of development and the concrete outcomes (exchanges of views and consultations on foreign and economic policies) have met the expectations and demands of both countries. Similarity of reform concepts that applies to the economy and recently also to politics, some parallelism in principles and, in certain aspects, in practice as well have added special features to our relations. These features have placed our country [Hungary] in a position that can be described as privileged, we have enjoyed some degree of priority in Chinese politics until recently. However, the situation is changing. With Honecker's visit and the declaration of the continuity of relations between the CCP and the SED, the GDR has preceded us in priority. We are now placed on the same level as the CzCP. With Zhivkov's visit already agreed on and party-to-party relations expected to be restored, with Jaruzelski's visit and the normalization of party to party relations expected by China to take place in 1987, the Chinese may expect faster development of relations with Bulgaria and Poland than with Hungary. We are the last but one among the countries of the Council for Mutual Economic Assistance in terms of foreign trade and a significant drop in trade is to be expected in 1987. Authorities in the Chinese People's Republic have knowledge of the ban on exports and imports imposed at the beginning of this year, and seem to suspect political motivation in the background. They have taken note of the intensity of demand on our part for China to open up to non-traditional economic cooperation, but we failed to respond to potential opportunities or responded to them with delay, inefficiently and in a disorganized way (e.g. proposal for the reconstruction of a bus manufacturing factory in January, Kahyb cooperation, refrigerator assembly plant and compressor manufacturing cooperation in Ningbo). China pays increased attention to Hungary's economic situation (and expresses certain concerns). Growing difficulties are either attributed to the reform process itself (mainly by those who disagree with the "Hungarian type" reform concept) or explained with a lack of consistent implementation (by supporters of the reforms). It is a fact, however, that the "Hungarian model" has obviously lost its attractiveness in the light of the situation we are now in. Reforming the economy is no longer a "Hungarian specialty". Hungarian experiences have lost their relative value as a consequence of measures taken in terms of principles and practice by the Soviet leadership, reform plans by the CzCP, ongoing transformation processes in Bulgaria, consolidation in Poland, and practical achievements in the GDR. After the lowest trade figures in 1981, the trade of goods between Hungary and China has been determined by the volume of Hungarian imports for the last two years. Similar to other countries, Hungary with an export oriented foreign trade aimed to secure markets for the sale of products^[2] in China.

In the initial phase of intensive development, China had limited supply of products that could have been bartered for Hungarian export items. In order to reduce our import from capitalist countries, we proposed to purchase raw materials in exchange. China rejected this proposal as it was able to trade these products for free [hard] currency, which is indispensable to rapid development in technology, and we are unable to provide China with advanced technology. The two countries had the same aspirations, which created tensions last year, when there was a sudden increase in the exchange of goods. Economic development did not reach the level that was planned for as a consequence of the irrational use of foreign exchange reserves and foreign loans, in addition the inflow of foreign capital was also slower than expected. Thus China was forced to introduce strict adjustments and impose restrictions on imports. Import was placed under strong central control, which is hard to fit into the general reform processes. Hungary is most sensitively affected by the ban on the import of motor vehicles. The ban on the import of special purpose transport vehicles is somewhat lighter. The situation is so grave that the number of unsold vehicles currently exceeds 150 thousand, and this figure is likely to reach 200 units by the end of the year, because substantially less was allocated from central resources to various companies to purchase vehicles even this year. Chinese foreign trade authorities say that the demand for vehicles has been overestimated in their plans. Restrictions had to be imposed due to economic problems. The(Chinese)  Ministry of Foreign Trade is of the opinion that it will be extremely difficult for China to draw up a list of goods to be imported in 1987 as plans agreed on for 1985-1990 in trade exchange include significant purchases of motor vehicles (buses, lorries and chassis) by China, which cannot be fulfilled. They would like to find the right solution to the problem, but have failed so far. Whatever solution will be worked out, prolonged negotiations on quotas are underway, and achieving plans envisaged for next year will be even more difficult than it was this year. A restriction on the export of raw materials is another important decision in Chinese foreign trade. China intends to sell raw materials for free [hard] foreign currencies in the future. This means that our efforts to buy raw materials will run into further difficulties. The third change in Chinese trading is related to the structure of goods as China aims at an increase in the sale of end-products. In addition to traditional export items such as products manufactured in the textile and light industries, China wishes to increase sales of machinery and electronic goods. Products that meet international standards will obviously be sold for free [hard] currency.

Purchase of steel, non-ferrous metal, plastic and artificial fertilizer will predominate Chinese imports, which is not a new feature but will receive stronger emphasis. There is such an overwhelming demand for these materials that China is even willing to agree to linked buying of other products. Members of the Chinese party and state leadership accentuate it every time that the same opportunities and the same forms of economic relations are available to socialist countries as to advanced capitalist countries. They have expressed willingness to make joint investments into the manufacture of products that meet world standards. According to diplomats from fraternal countries, Chinese leaders are of the opinion that the current level in the exchange of goods cannot be increased in the next few years to come. Since they consider China to be an important economic partner, they are seeking new forms for economic cooperation. They are weighing the potentials in joint investments. The safest and most profitable investments for us seem to be in the service industry. The Chinese-Polish shipping company established earlier is operated with good efficiency, and further development is underway. Socialist countries also know about the unfavorable reception of investments by capitalist countries in China. It mainly arises from the difficulties in the repatriation of capital and from the deficiencies of the underdeveloped legal system in China. The Chinese Ministry for Foreign Trade is of the opinion that the sudden, large-scale increase in the volumes of exchange of goods planned for 1985 and especially for 1986 was a mistake. Gradual development is considered to be the only way to stability. For the reasons described above, authorities responsible for the central planning of foreign trade have received orders for substantially smaller volumes for 1987. Contrary to previous years, the exchange of goods will not be determined by the foreign partner but by the volume of imports by China. Quotas for 1987 have been agreed on only with Czechoslovakia and the GDR among all the socialist countries. Neither country will have to suffer reductions in trading, the GDR even negotiated successfully for a 10 per cent increase. Both sides explain this with political reasons. The agreement on the exchange of goods for 1987 was signed by the GDR during Honecker's visit while Czechoslovakia fended off a drop in foreign trade with China on the grounds of a meeting between prime ministers scheduled for next year. Fulfillment of quotas is much better, nearing 100 per cent with these two countries this year too. The reasons for the Hungarian failure to meet plans are known at home too, and the CC resolution in July provided partial remedy. Although plans were not fulfilled, the situation is somewhat improving as the passive debts China has accumulated over recent years are expected to be cleared this year.

Note: The information provided here mainly comes from Chinese sources, a [smaller]^[3] part of the information was received from fraternal sources.

-352- Jász

^[1] Hand written side note says "there are 7".

^[2] One or two words are illegible here but meaning can be deduced from the structure of the Hungarian sentence.

^[3]  an illegible word here