6.
3
In recent years both agriculture and light industries have enjoyed more rapid growth than heavy industries. But the growth rates of energy output and of the output of raw materials and semi-manufactures, though
fairly rapid, have lagged behind the growth rate of the economy generally. In consequence, the long standing problem of an insufficient supply of energy and of raw materials and semi-manufactures to meet industrial demand has become increasingly acute. China's transportation and communication system, which remains backward and inefficient, has also been under great pressure despite recent efforts to enlarge its capacity. These problems
reflect fundamental structural imbalances in the Chinese
economy which will take time to correct. In a large centrally planned economy, adjustments to changes (either internal or external) are likely to take longer than they would in a small free market economy like Hong Kong.
7.
The tremendous increase in aggregate demand in 1984 and 1985 has outpaced aggregate supply in the economy and, coupled with the Chinese consumers' preference for foreign goods, has resulted in a very rapid increase in the amount of goods imported into China and rapid increases in prices generally. This has caused a sharp deterioration in China's visible trade balance. The
visible trade deficits which have incurred since the fourth quarter of 1984 were the most important factor causing the sharp depletion of China's foreign exchange reserves since September 1984.
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CONFIDENTIAL # 3