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Digital Archive International History Declassified

December, 1987

CHINESE VIEWS ON HUNGARIAN ECONOMIC REFORMS AND SINO-HUNGARIAN TRADE RELATIONS

This document was made possible with support from the MacArthur Foundation, Leon Levy Foundation

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    A Hungarian assessment on China's reform and opening and China's views of reforms ongoing inside of Hungary.
    "Chinese Views on Hungarian Economic Reforms and Sino-Hungarian Trade Relations," December, 1987, History and Public Policy Program Digital Archive, Historical Archives of the Hungarian State Security (ÁBTL), 1. 11. 4. S-II/2/87, pp. 32-42. Obtained by Peter Vamos and translated by Katalin Varga. https://digitalarchive.wilsoncenter.org/document/119357
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[Chinese views on Hungarian economic reforms and Sino–Hungarian trade relations. No date, but presumably late 1987]

1.) Turning point and opportunity

First of all, it is helpful and interesting to have an overview of the changes the Chinese government introduced in their policies in more than a decade. These changes took place in the field of both domestic and foreign politics. In fact, it was these favorable changes that created favorable conditions for reforms in the Chinese economy. However, it should be stressed that the further development of these positive tendencies is mainly reinforced and promoted by the fundamental measures of the economic reform.

Consequently, it is not only changes taking place in Chinese foreign policy that influence Chinese-Hungarian relations to a great extent, but also the [Chinese] interest in the economic reform or the aspirations to gain more profound insight into the reform processes.

I must add my opinion here that it would be wrong to put the blame entirely on the leadership of the two countries for not recognizing the opportunity in good time and failing to exert efforts for the improvement of relations. However, it is justified to state that neither country was aware of these potential opportunities.

2.) Hungarian economic reforms in China's focus of attention

At the end of 1978, the Chinese government changed its policy adopted earlier, and stepped on the road to reforms and opening up. Extensive debates (earlier conducted only in limited circles) ensued about reforming the mechanism of economic management. This was a political turning point that encouraged reform-minded Chinese politicians to explore possibilities. In order to prove the continuity of former foreign policy, China first examined the Yugoslav system of self-management. (Since we considered Yugoslavia and Romania as fraternal socialist countries at the time.) A good number of high level political and economic delegations paid visits to Yugoslavia, studies and books were published on the system adopted in Yugoslavia.

A great deal of useful experience was gathered, but Chinese leaders were alarmed by the high rate of inflation and the lack of efficiency of macro level management in Yugoslavia. This was the reason why China shifted focus, and began to examine the Romanian system more and more intensely. At the same time, experts grew actively interested in the Hungarian reform process.

Chinese political thinking became focused, with increasing interest, on Hungarian reforms in the early 1980s as a result of further advancements in Chinese foreign policy and scientific research.

Chinese leaders gradually adopted the view that socialist countries could currently be sorted into three wide categories in terms of socialist economic management mechanisms:

The traditional Soviet model (including its somewhat modified variants) constitutes the first category. The Soviet Union, Romania Czechoslovakia, Bulgaria, the GDR and Poland belonged here...

The second category is represented by the Yugoslav self-management system.

The new economic mechanism introduced in Hungary belongs to the third category.

3.) Intensive exploration of the Hungarian reform

With the help of economic reforms, the new leadership in China wished to resolve political and economic tensions caused by the "cultural revolution". Although reforms are strongly emphasized, the leadership intends to [avoid][1] any kind of political shock. These leaders have experienced the cultural revolution, and aim to stabilize the political situation. Learning from the experiences gained well over 30 years, they have recognized that the socialist economy is a commodity economy after all, commodity and money relations need to be asserted, but strong central control has to be maintained by all means. This is one of the reasons why the Chinese leadership has grown increasingly interested in the Hungarian reform agenda.

A delegation of Chinese economists headed by Yu Guangyuan visited Hungary in November 1979. (Yu is a leading Chinese economist, vice-president of the Academy of Social Sciences. Su Shaozhi and Liu Guoguang were also members of the delegation.

Summing up the experiences gained during their visit with a view on research findings reached in China, the delegation has drawn the following conclusions:

a/ The Hungarian economic reform is socialist in its character

This is an extremely significant fact in terms of making preparations and laying the foundations for reforms in China. Research findings and experiences gained locally [during the visit to Hungary] clearly indicate the validity of the above statement. The report written by the delegation highlights that 98% of the national revenue is produced in the socialist sector. Hungary has remained committed to the concept of a planned economy even after the reforms, and is all the more aware of the significance of the planned development of the national economy.

Clarification of and an emphasis on this issue carry both theoretical and practical significance for the Chinese political thinking. The exploration and research of Hungarian reforms even promoted China's opening up to Eastern European socialist countries.

b/ The Hungarian reform has yielded remarkable results

The Hungarian economic reform is seen favorably in many aspects. The balanced supply of goods, the rise in the living standards of the population, the continuing stability of the political situation, and the development of democracy in the life of the economy and society are all judged positively.

It can be concluded from the success of the Hungarian reform policy that making careful preparations and laying the scientific foundations are vitally important before reforms are introduced. Therefore it is necessary to conduct democratic debates and to do scientific research in preparation for the reforms. The mistakes made in the old mechanism are to be analyzed scientifically, and deficiencies are to be strongly criticized.

c/ The Hungarian example reinforces the correctness of the socialist search for new pathways

The Hungarian reforms are essentially in harmony with Hungarian characteristics, which is one of the main sources of the success of Hungarian reforms. History and Hungarian reform experience prove that models implemented in other socialist countries cannot be copied automatically. Every socialist country has to combine the fundamental teachings of Marxism with the characteristics of their own countries in a constructive way.

d/ Fundamental weaknesses of the Hungarian reform

Following the introduction of the new economic mechanism, market mechanisms still have limited effects. For this very reason, the system lacks real resilience to respond to changes in market conditions. The economic autonomy of enterprises is affected unfavorably by the restraints imposed by the authorities.

Researching the Hungarian reforms gained new impetus in China after the visit of the delegation in Hungary.

Despite the favorable political climate and intensive scientific research, the leadership failed to take action regarding the exploration of the Hungarian question. In order to promote the research of the Hungarian economic reform, a preparatory commission was set up with the aim to establish a society for Hungarian economic research. Although the Chinese public was much more interested in the Hungarian reform than in the management system in other countries, the initiative to establish such a society did not receive approval. This posed significant obstacle to more thorough and better organized research of Hungarian issues.

Upon his return home from Hungary, Yu Guangyuan put forward the proposal to the government and the Academy of Social Sciences that researching Eastern European countries should be taken up intensively. In his proposal experts who were forced by previous political campaigns to move to other areas were to be summoned back. Literature published on the policies and economies of these countries are to be translated with adequate expertise, and experiences are to be analyzed in good time. Due to a lack of sufficient government support, this proposal was eventually abandoned.

4.) The Hungarian model and the Chinese reform decision

The Reform Commission was set up alongside the State Council in China in 1982. Preparations for the implementation of reforms were personally directed by Zhao Ziyang. On the basis of scientific research and the assessment of the Chinese situation, the Premier repeatedly pointed out in 1983 that the economic management system of socialist countries in general, and that of the Soviet Union and Hungary in specific, should be analyzed in depth. Zhao Ziyang would make reference to Hungarian experiences in his speeches he delivered subsequently in order to give an overview of how reforms were being implemented in China and what future China was heading for (e.g. regarding price and taxation reforms). Chinese delegations that visited Hungary in 1983 and 1985 were headed by Liao Jili. The first visit served as preparations for the Chinese resolution to introduce reforms, the second promoted the implementation of the resolution.

When in 1983 the Premier listened to the report of the delegation, he spoke highly of one of the fundamental elements of the Hungarian reform that combined a centrally planned economy with market mechanisms. He was convinced that this principle could be applied not only in Hungary but also in China and other socialist countries.

He added that he disagreed with the widespread view that it was more feasible to introduce the method of indirect [decentralized] management in a smaller socialist country than in a large one. He was of the opinion that an excessively centralized management system would not work with real efficiency in a huge country like China; decentralized management could be and should be employed in China. Apart from the Premier, other Chinese leaders also stated positive judgments of the Hungarian reforms. No coincidence was the commonly shared opinion that the Chinese reform agenda included principles that were the same as or similar to the new Hungarian economic mechanism (e.g. relationship between plan and market, mixed price mechanism, interest relations.

The second visit aimed to explore solutions to issues that had emerged in the course of Chinese reforms (e.g. the relationship between price and wage reform, further development of the taxation system). The delegation also paid intensive attention to the reform introduced in the Hungarian system of organization.

In addition to the delegations of the Academy and the Reform Commission, various other professional delegations also visited Hungary. The Hungarian reform process generally received positive evaluation, but two issues led to debates. Some experts were of the opinion that the command economy had not been replaced after all, others held the view that the old command system had been discontinued, but its effects were still perceptible, and some measures showed resemblance to measures characteristic of a command economy.

Hungary's foreign indebtedness was the second issue that raised disagreement. Some think that it is the reforms themselves that led to [Hungary's] high debt position, and the increase in the standards of living was financed from foreign loans. The Hungarian reform was unsuccessful if viewed from this perspective. Others formulated the opinion that increasing debts were caused by the reforms being slowed down, and by the fact that the Hungarian reforms were not radical enough, and were made subject to negotiations in many cases.

5.) Chinese and Hungarian reforms face new challenges and turning points

Chinese reforms yielded extremely good results, especially in the area of agriculture. However, new problems emerged as a consequence of economic development, and unsolved old difficulties increased tensions. This indicates that reform measures introduced so far only mark an initial stage in the reform process. More profound reforms are needed to be able to solve economic, political and social problems.

Price making is one of the central issues in the Chinese reform process. The national economy underwent temporary development due to the parallel existence of prices fixed by authorities and prices determined by market forces, but this caused confusion and tension in terms of commodity and money relations and running the economy itself. This led to widespread speculations, and the price of many products went up drastically. Certain strata in society, mainly low-paid workers, employees and intellectuals, were put in a difficult position. Increasing prices usually bring about an increase in wages and salaries (most often in a disguised way). A certain degree of restratification took place in the Chinese society as a consequence of differences in income, which created serious social restlessness. The pursuit to reach as much economic growth as possible was also a source of severe problems. Some actors began to disapprove of the reforms, and tended to resort to old patterns as well as to hinder the reform process.

In 1986, Gao Shanjuan headed a 18-member delegation, mainly young economists, who were committed to a more radical reform policy. A number of delegations travelled to Hungary in 1987, and it should be noted here that although they expressed their appreciation of the reforms, they tended to view reform measures employed in Hungary and China increasingly critically.

In the past two years, the Chinese drew the following conclusions about the further development of the Hungarian and Chinese reforms:

a/ The continuation and further refinement of the reforms is the only way to achieve socialist economic and social development as shown by the examples of the two countries and Yugoslavia.

b/ The implementation of reforms is a complex process, it can only be done gradually, and neither country has reached the final stage in the process as the economic mechanism in these countries is still "disparate", it is difficult to establish the autonomy of economic organizations without real capital and labor markets. Results attained in the reform process need to be judged realistically, there is no such a thing as a perfect reform agenda.

c/ Difficulties are to be faced openly, favorable opportunities for implementing irreversible reforms need to be seized. It is an important lesson learnt from the Hungarian reforms that the favorable opportunity to implement organizational reforms and to establish a capital market was not seized by the Hungarians. Difficulties are currently caused by the reform process being slowed down. It is difficult to launch essential reform processes in a situation when the population's standard of living is falling and the tolerance of a society is weakening.

d/ Economic and political reforms need to be implemented side by side, in other words, the reform process needs to be managed in a complex way. Economic reforms cannot be successfully implemented without changing the political setting that evolved in the former management system.

e/ It was a serious deficiency in the Hungarian reform that the process on micro level was poorly implemented. Companies remained in a dependent position, directors are still appointed by ministries. There is no real bankruptcy law. Companies cannot operate efficiently in the hotchpotch of regulations, subsidies and taxes. Thus concepts for indirect management have failed: economic clarity is largely missing amidst masses of distorted price relations, subsidies and company taxes. The price and taxation systems need to be reformed in Hungary, and at the same time the banking system and salaries and wages also need to be reformed. Following his visit in Hungary, Zhao Ziyang pointed out that China should not enter this blind alley.

6.) The Hungarian reform will encounter great difficulties and new turning points in the future

a/ Taking into account the problems Hungary had to face, the Chinese leadership concluded that a country always needed to be careful about the level of its foreign debts, and all loans received needed to be put to efficient use at all times. These difficulties serve as warning signs for the Chinese leadership.

b/ Relying on China's own and other socialist countries' experiences, China managed to slow down the pace of excessive economic growth in good time. This rational pace has contributed to the relatively steady and even development of the Chinese national economy.

c/ The Chinese public follows the developments in the Hungarian reform process with anxiety, at the same time it is convinced of the success [of Hungarian reforms].

The previous success of the Hungarian people gave encouragement to reformists in China. However, in the 1980s an increasing number of reports revealed that the Hungarian people's standard of living was declining.

A good number of Chinese reformists have adopted the theory of the Hungarian reforms, and they now pay extremely careful attention to new developments. The Chinese leaders and the Chinese people clearly wish that the new concepts in the Hungarian reform process proved successful as the reforms in the two countries share an extremely lot in common.

d/ Significant interest is shown in the Hungarian political reform as well, without which the ultimate goals of economic reforms cannot be fulfilled. At the launch of the Chinese economic reforms, the leadership had plans for serious political reforms as well: clear separation of party and government functions, the party's role played in the economic life, young leaders to replace the old, transformation of the election system, etc. The implementation, and even the preparation, of such political reform has run and still runs into many obstacles. First of all the reduction of bureaucracy poses a problem.

This is why China is very much interested in the Hungarian experiences gained in this field.

Following the Cultural Revolution, significant reorganization was implemented by the Chinese party and government, which laid the foundations for economic reforms. This situation bears resemblance to the Hungarian situation after 1956. However, neither country has introduced essential political reform prior or parallel to their economic reforms. Now both countries emphasize its importance, and are taking steps in this direction. The Chinese public is extremely interested in the reform of the Hungarian election system, the establishment of organizations for the representation of interests, improvements aimed at a better division of labor between the party and the government, etc.

e/ Studying the new taxation system and other Hungarian reform measures

The Chinese leadership responded positively to the new measures introduced and statements made by the Hungarian party and government regarding the continuation of the reform policy and efforts to solve economic difficulties. Zhao Ziyang drew special attention to the importance of studying the Hungarian taxation system and corporate management model.

However, it needs to be added that the opinions formed by Chinese leaders and Chinese diplomats vary regarding how long it will take the Hungarian leadership to tackle current difficulties and what instruments can be used.

7.) Chinese foreign policy and foreign trade in the relationship with Hungary

If we take a brief overview of bilateral economic relations, it is not difficult to notice that foreign policy determines the development of relations – at least on China's part! The Chinese leadership often states the view that trade relations serve as a tool in the execution of foreign policy. Chinese foreign trade was developed on the basis of this principle for decades. Being aware of this helps us to understand why Chinese foreign trade with the USSR and other Comecon countries (with the exception of Romania) declined to such an extent in previous years.

8.) Milestones in the development of Sino-Hungarian economic relations

- 1949 diplomatic relations between the two countries established

- 1950 mutual exchange of goods started

- In 1956 turnover in the bilateral exchange of goods totaled 83.5 million US dollars

However, the "great leap forward" and its impacts on foreign policy led to a significant drop in Chinese foreign trade, first of all in trading with socialist countries.

In 1964, the turnover in bilateral foreign trade reached only 15 million US dollars. Decline was replaced by stagnation during the Cultural Revolution, the turnover in the exchange of goods was 20.7 million dollars in 1970.

- By 1979 turnover rose to 142.2 million dollars. Apart from improved political relations, this growth can also be attributed to the fact that the government led by Hua Guofeng made efforts to reach significant development from the mid-1970s until the end of the decade, which caused serious setback to the national economy. This explains why a certain degree of decline was experienced in the early 1980s (turnover dropped to 76.6 million US dollars in 1982) despite reforms and the policy of opening up.

- Turnover rose steadily from 1982, it was over 588 million Swiss francs in 1986, and planned to total 600 million Swiss francs this year.

Despite this significant increase, trade between the two countries represent a small share in terms of foreign trade turnover realized (Hungary has a 0.3% share in foreign trade to China, and China only has a 1.3% share in foreign trade to Hungary).

9.) What are the barriers to the further improvement of bilateral economic relations?

Although the change in China's foreign policy has created favorable conditions for the development of foreign trade, there are still many factors hindering a more rapid pace of development:

- The most significant of these factors is the structure of goods! 70% of the Chinese export to Hungary is consumer goods (most of all products manufactured in the light and food industries).  The composition of goods exported by Hungary has not changed significantly for the last decade, 60-70% of Hungary's export includes products of the machine industry. China is convinced that there are great resources for the development of bilateral trade provided that Hungary is ready to change the structure of its export to China. For instance there is a larger demand in China for aluminum blocks and steel goods. China would even be ready to pay for the import of aluminum blocks in hard currency. A number of socialist countries realize a higher turnover in foreign trade with China than Hungary does, which is due to a better product structure in the view of officials in Beijing.

- The increase in turnover is also dependent, to a great extent, on the quality of goods. The question of price is also crucial! Hungarian products are generally considered to be of medium quality. The quality of pharmaceutical products and mixing plants [2]is regarded to be extremely good while other products are not flawless in quality. For example, black and white TV sets made in Hungary are relatively expensive while their quality is often criticized. All in all, it can be stated that market research and information processing done by Hungary is not yet optimal, but the same can be said of China as a trading partner.

10.) Making good use of opportunities and resources

The Chinese reforms and the policy of opening up not only promote the development of China's foreign trade, but also create more favorable conditions and larger scope for foreign trading. Initially the policy of opening up was only aimed at advanced capitalist countries , but the scope has been widened to all countries since the mid-1980s.

However, in addition to widening opportunities, this policy also sets more serious requirements for foreign trade. It is important to add that a vital shift in attitude has taken place in China as well in terms of foreign trade. For instance, imports from socialist countries were earlier mainly determined by the need to supplement the amount and selection of Chinese domestic products. Today international division of labor and efficiency are coming increasingly in focus. Political considerations are being pushed to the background, while quality aspects are coming to the foreground. There is an ongoing competition for the Chinese market between goods produced in capitalist and socialist countries. On the whole the exchange of goods with socialist countries is mutually beneficial to both sides. At the same time quality requirements are beginning to dominate in the Chinese market too.

Although a new approach has evolved in foreign trade, the impact of political relations on foreign trade relations cannot be neglected. The mutual interest in the implementation of economic reforms may contribute to the further development of bilateral foreign trade to a significant extent. However, intensive and well-considered work is still needed in this field.

Powerful resources lie in the modernization of old Chinese factories, in the introduction of new technologies in the industry and agriculture, and in cooperation in the field of technology and sciences.

[1] Missing word that can be deduced from the context.

[2] It is not clear what sort of mixing plants, pharmaceutical or other,  are meant here.

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