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the centre of Chinese policy debate. Debate on details of policy is itself perhaps wider, more rational and better informed than ever before in China. The concept of "socialism with Chinese characteristics" is proving serviceable in justifying radical departures from Marxist-Leninist dogma without threatening Communisty Party legitimacy. And reformist leaders now dominate at least the upper levels of almost all arms of Chinese authority.
4. Against this, however, the reforms in the urban economy are still at a stage where each step forward can create serious new problems. There are good indications that, in some areas and sectors, retail price inflation is running well ahead of increases in income. The foreign currency position is perhaps more complicated than paragraph 6 implies: China experienced an unprecedented visible balance of trade deficit in 1985 of either US$7.6bn or US$13.8 bn, according to different Chinese official sources. Last year's immediate crisis has been brought under control; and the Chinese would not allow external debt to become large enough to create serious debt service problems. But China's ability to increase exports, and thereby generate foreign exchange for imported technology, looks likely to become an increasingly important factor in her overall rate of development. The problem is highlighted by the fall in oil prices and by the continued failure of China's offshore oil fields to live up to earlier expectations.
5.
The impact of these problems is accentuated by other undesirable by-products of current policies. The Ambassador is right to point to the dangers of corruption and the ideological vacuum. A recent secret report, which we are submitting separately, indicates that Deng may be under serious pressure from conservative elements over corruption. The student unrest in late 1985 may indicate that material expectations are becoming unrealistically high, particularly amongst the young. Furthermore, although Deng has put successors in place, his personal mantle will not fit them snugly. None has his authority and therefore his scope to take risks; and in China good government has always required a strong Emperor.
6. I see no danger of a return after Deng to virulent ideological factionalism on the lines of the Cultural Revolution; or even a major reversal of the reforms already implemented. However, it is possible that the current zeal and thrust of the reform process may gradually dissipate in the face of economic and social problems coupled with political jockeying for position. The Chinese have already announced that no major new economic reforms will be carried
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