CONFIDENTIAL
BRITISH EMBASSY,
PEKING.
The Rt Hon Sir Geoffrey Howe QC MP etc. etc. etc.
Foreign and Commonwealth Office LONDON'S W 1.
20 January 1986
Sir,
ANNUAL REVIEW:
CHINA
China did not have as good a year in 1985 as her leaders undoubtedly hoped for. Nor did she have as bad
a year as has been suggested by some in the Western press.
China:
2.
Internal
In these days, politics in China is largely economics. The leadership is engaged in carrying through a thorough- going programme of economic reform. Its three main
purposes, as I see them, are to improve allocative efficiency, to improve the productivity of all factors of production (especially capital and land) and to exploit all possible gains from international trade. As to methods, nothing except the reversion of land and industrial capital to private ownership has been ruled out.
3. In the autumn of 1984, the leadership set out to extend this programme to industry and commerce, and to the sensitive areas of prices and wages, and to take it further in relation to the outside world. But before it could do very much about these things, it became the victim of a double-headed economic crisis. One head was caused by an excessive creation of credit by the banking system, the
other by a sudden surge in imports.
The former led to a
rapid increase in the money supply, which in turn led to higher prices. The latter led to a rapid rundown in
China's reserves.
CONFIDENTIAL
/ 4.