CONFIDENTIAL ##
7
dollar or sterling assets, in recent years and the support provided to the exchange rate of the RMB by a strong reserve position, it was likely that a positive real return in RMB terms could be earned on foreign exchange
reserves held abroad.
16.
The last two arguments on the effect of
increases in the reserves on the money supply and
inflation are correct unless measures were taken to
sterilise the additional money flows. To the extent that a successful exporter is provided with RMB for the foreign exchange earned, this adds to spending power within the
economy. Unless unemployed resources within the domestic economy can be mobilised or imports allowed to add sufficiently to supply to offset the increase in demand an
imbalance is created. This can manifest itself in excess
demand for goods and services, either forcing up their prices or, if prices are fixed, as they may often be in
China, resulting in unsatisfied demand and unintended
savings. If these savings are deposited in the banks, they will be forced to look more widely for lending opportunities and may be induced to lend to riskier
projects, especially if the interest rate they can charge
is fixed.
17.
Under the former, centrally-controlled system all foreign exchange earnings went to the central authorities who directly controlled their use. Further,
the extra spending power arising from extra exports could effectively be "taxed away" by the authorities through their control of the prices received by enterprises from the limited number of trading organisations involved in
exporting. However, in the freer climate prevailing in
1984 the Chinese authorities apparently decided to allow extra imports to soak up the extra spending power.
CONFIDENTIAI KA