current (but not necessarily capital) purchases. The Fund recognizes, however, that many countries cannot or will not immediately make their currencies fully convertible and use various methods to restrict currency transactions. Such countries are subject to a "transitional period" defined in article 14 and must consult with the IMF annually on further retention of such practices. The Fund may "make representations to any members." 72 in an attempt to remove such restrictions. A strict interpretation of IMF regulations would make it difficult for any CPE including China to join the IMF. Franklin Holtzman describes the problem as follows: The distinctive feature of the Communist problem is not currency inconvertibility but what has been called commodity inconvertibility. Currency inconvertibility is the garden variety capitalist disease and can be cured (temporarily at least) by devaluation. This is not the case with commodity inconvertibility. As we noted, the exchange rate is not a real price in case of countries which suffer from commodity inconvertibility-hence devaluation is meaningless and has no effect on trade; trade is conducted at world prices regardless of domestic prices and official exchange rates." 73 But as the Fund's General Counsel, Joseph Gold has emphasized: There can be no doubt that the architects of the Fund contemplated a place within the structure for countries with state-controlled economies. The U.S.S.R. attended the Bretton Woods conference and various issues its delegates raised there and in earlier discussions led to the incorporation of some provisions and affected the drafting of others in order to make it easier for the U.S.S.R. to take up membership." Nevertheless, as he himself has written, "it is not clear how the drafters of the articles reconciled membership for countries with state-controlled economies with all the obligations of membership." " While the admission of CPE's into the IMF does not pose insurmountable problems (Romania joined in December 1972), there remain serious questions about the reconciliation of IMF goals with the present economic structure of CPE's. Again it is worthwhile to quote Joseph Gold at length: The admission of countries with state-controlled economies does not imply that in consultation with them the Fund will refrain from urging that they will benefit from the reduction and eventual elimination of discrimination, bilateralism, multiple rates of exchange and other practices incompatible with the purposes of the Fund. This advice is tempered with patience and throughout extensive periods the Fund may go on approving practices that are inconsistent with the articles unless approved.7 As we have concluded in section 3, the RMB is only convertible in the narrow sense of being offered for sale if a purchaser of PRC goods has a contract for which he can prove a need for RMB. Presumably, the Chinese would also be able to meet the IMF requirement which requires a country to repurchase any of its own surplus currency held by another country (using either gold or currency of the other country). However, as in other CPE's the full jump to allowing foreigners to purchase RMB to use freely in purchasing from Chinese enterprises would strike at the very heart of the separation of foreign trade and 72 Ibid. p. 579. 73 Franklin D. Holtzman, "East-West Trade and Investment Policy Issues: Past and Future," in Joint Economic Committee, Soviet Economic Propects for the Seventies, June 27, 1973, p. 683. 74 Joseph Gold, "Membership in the Fund," Finance and Development, vol. 12, No. 1, March 1975, p. 44. 75 Ibid. 70 Gold, Membership and Nonmembership, op. cit. p. 143. domestic economic activity. There is no indication that Chinese planners have even begun to experiment with giving their enterprises the same degree of flexibility in foreign trade as in Hungary and soine other CPE's." Finally, assuming that China was assigned a quota of $1 billion, at least 75 percent could be paid in the Chinese currency-RMB. Originally, IMF requirements required at least 25 percent of the quota (or 10 percent of net official gold and dollar holdings) to be paid in gold. Recently this requirement has been moderated: The fund has insisted on the subscription of some gold, although sometimes only in symbolic amounts, until 1973 when it considered an application by a coun'try that held no gold and could not obtain it from official sources. 78 In conclusion, given the uncertainty about the future shape of the world monetary system and our lack of knowledge about China's intentions, it is difficult to assess the possibility of future PRC membership in the IMF and World Bank. About all that can be said with assurance is that the IMF's attitude about relationships with CPE's is one of cautious ambiguity. Again we quote from Joseph Gold: It is legitimate to conclude that the Fund has applied its criteria for membership with flexibility and has been guided by an unformulated policy of readiness to accept as wide a membership as possible. 79 CONCLUSION China's practices in financing trade with non-Communist countries are in substantial contrast to those of the other CPE's. Despite the fact that the PRC has a greater share of its trade with the West than other CPE's, the PRC has been more reluctant to adopt as many Western banking practices as the other CPE's. Many of the practices that have been adopted have been modified with the general result that the PRC maintains somewhat more control over its international finance with the West than other CPE's do. Examples of this range from requiring negotiation of letters of credit in China both for exports and imports to using the renminbi to denominate trade contracts. Most importantly, the PRC has, as yet, been unwilling to follow other CPE's in adopting Western banking techniques such as setting up European branches to engage in archetypical banking activities such as general trade financing and active participation on the Eurocurrency market. On the other hand, PRC international financial practices have changed in the last few years generally in the direction of adopting more "traditional" practices. The Chinese FTC's have been more flexible on various letter of credit provisions and they have become more willing to denominate trade contracts in Western currencies. Most important of all, of course, the PRC has begun to accept credit, albeit in moderation and often indirectly. Whether these add up to significant steps toward substantially more aggressive and more traditional international financial activities is much more problematical. Recent events may be short-run adaptations to unexpected foreign trade deficits (i.e., the large agricultural purchases following the poor 1972 harvest) or to one-shot purchases of capital equipment. On the other hand, they may portend a more farreaching change. The conclusion depends on one's view about China's future emphasis on foreign trade and the policymakers' views about how much foreign equipment will be needed to carry out industrial development plans. If such imports are expected to be large, it will imply either rapidly increasing PRC exports or seeking some form of trade finance. In either case, more flexible international financial practices can be anticipated. ACQUISITION AND DIFFUSION OF TECHNOLOGY IN CHINA By HANS HEYMANN, Jr. SUMMARY Evolution The People's Republic of China has exhibited wide swings in its receptivity to foreign technology in the course of its 25-year history, oscillating between enthusiastic acceptance and determined rejection. In the 1950's-the era of close Sino-Soviet cooperation-China eagerly accepted what was undoubtedly the most comprehensive technology transfer in modern history. During that decade the Chinese obtained from the Soviet Union the foundation of a modern industrial system. In the process, however, the Chinese became heavily dependent on Soviet tutelage and were induced to adopt a Soviet model of forced industrialization inappropriate to China's resource endowment. In the late 1950's, the Chinese leaders began to reject this model and the overwhelming Soviet influence. The Great Leap Forward marked the reaffirmation of a more traditional Chinese nativism and self-assertion. Foreign technology and expertise were rebuffed and a policy of selfreliance instituted. Inept policies, successive crop failures, and the sudden withdrawal of Soviet technicians in 1960 combined to throw the Chinese economy into disarray. A shift in the early sixties toward priority for agriculture and a return to a more permissive technology-import policy helped to revive the economy. While continuing to stress self-reliance, the leadership undertook selective purchases of European and Japanese plants and equipment, primarily as prototypes for learning and copying. By 1965, the economy had largely recovered from its earlier setbacks, only to be disrupted once more by the turmoil of the Cultural Revolution. The intense antiforeign campaign of that period again sharply curtailed acquisition of foreign technology, and by 1969 machinery imports had dropped to less than one-fourth of the peak levels attained 10 years earlier. Since 1970, the Chinese leaders have turned outward once again for the acquisition of capital equipment and know-how on a substantial scale. No longer confining themselves to prototypes, the Chinese have purchased large numbers of complete plants and industrial complexes to enhance output in a half-dozen basic industries, primarily metallurgy, petrochemicals, and energy. Machinery imports, therefore, have risen more rapidly in recent years than during any previous period. Self-reliance continues to be stressed, nevertheless, with at least three objects in view: (1) to minimize China's strategic and financial dependence on foreign countries; (2) to create a self-confident "new Maoist man" and guard against his contamination by alien influences; and (3) to mobilize local savings so as to economize scarce foreign exchange and state investment outlays. The pursuit of self-reliance in these terms has enabled the Chinese to achieve a high degree of technical and economic independence of the outside world. China's own production of machinery and equipment is now so large that imported technology represents only a small fraction (perhaps 6 to 8 percent) of its overall technology accretion. In qualitative terms, however, technology imports are still a key factor in the development of the more sophisticated sectors of China's industrial production system. Modes of Production Three distinct modes of production coexist in China today: scientific laboratory industry, urban industry, and rural industry. Their interest in, and access to, foreign technology also differ sharply. SCIENTIFIC LABORATORY INDUSTRY Is an outgrowth of Mao's insistence that all research be linked to production. It is made up of small, scientist-guided pilot plants and laboratory workshops established within or under sponsorship of universities and research institutes. Laboratory industry focuses on trial production at the technological frontier, but it also produces sophisticated components in quantity, especially in electronics. Its principal aim is to achieve self-reliance in high technology. Thus, while it greatly values international scientific contacts and information, its demand for foreign technology is relatively small. URBAN INDUSTRY The principal claimant for foreign technology, consists of two subgroups: (a) Large-scale basic and military industry, centrally controlled. This group includes all of the capital goods plants originally obtained from the Russians and subsequently expanded through large state investments. These plants massproduce standardized output of tried and proven design. Lacking engineering experience, they tend not to be highly innovative. Their product quality and production efficiency stand to benefit greatly from the importation of modern process equipment and complete plants. (b) Medium- to small-scale manufacturing enterprises, under provincial or municipal control. Most of these evolved out of simple workshops or machine shops established in the prewar era of private sector industrial development in China. They possess a depth of design and engineering experience that makes them much more dynamic and innovative than the large central plants. They enjoy considerable decisionmaking autonomy in upgrading their own technical capabilities and in promoting new product development within their own regions. But the more important campaigns to diffuse technology across provinical lines are largely directed from the center. The most advanced plants in this group do have access to foreign technology, principally in the form of production equipment and prototypes for adaptation or copying. In short, both of these urban industry subgroups are major end-users of foreign technology, with interests extending across the entire technology spectrum. RURAL INDUSTRY Technologically the least sophisticated, is entirely locally directed, operating at the level of the county and below. Its output, mostly nonstandardized and of low quality, is mainly aimed at the needs of agriculture-chemical fertilizers, cement, energy, farm machinery, and implements. The rural production units, of which there are roughly |