UK CONFIDENTIAL
the revision of the 1981 budget could well mean that the PLA will be asked to accept further reductions in the budget figure(and the allocation for capital construction) as Central government attempts to control its expenditure. not know what will happen to procurement and r & d, but there is an increased probability that consideration is being given to actually reducing overall expenditure.
This is of course primarily a political question relating to how the PLA might react to real cuts, and to what alternatives are open to the leadership.
In any event the prospects for significant advances in modernisation of the armed forces. must remain distant in view of the lack of progress so far acheived,
The prospects for imports of defence equipment,
on
a selective basis, also remains more a political than an economic question; ̈we believe that the foreign currency could be made available for key projects given the political will. This presumably remains a method by which discontent in the PLA could be mollified.
Conclusion
11. This is the third change in economic policy in as many years, and it seems likely that the Chinese will continue to have problems in formulating and implement- ing the strategy appropriate to their current condition and their ultimate aim. Even if the leadership manages to put together an appropriate strategy it is far from certain that they will be able to apply it in the way they would wish; the limitations imposed by the administrative system and administrative personnel (not all of who understand or accept the new policies) have already caused problems, and may still frustrate the revised policy. Further details of the Chinese view of the way ahead, the extent to which they will moderate the pace of economic reform, and the real impact of the new emphasis on the economy, should emerge in the course of the next few months. In general we believe the Chinese leadership still wish to move eventually to a less inflexible economy governed to a greater extent by market forces, with much of the economic decision-making undertaken at local level, but guided by overall state plans. But we judge that the Chinese now believe that the full development of such a system must wait until the mid-1980s at the earliest, in particular because of the difficulties inherent in reforming the structure of prices, which is essential if market forces are to operate effectively. We believe the Chinese leadership still view imports of Western and Japanese technology, equipment and expertise as a necessary element in the realisation of China's long-term plans, but that Chinese purchasing is likely to be very selective well into the 1980's.
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UK CONFIDENTIAL