CONFIDENTIAL **
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47.
It is reasonable to expect that the "double-track price system" and the subsidies to both consumers and enterprises will remain for some time. The very existence of these, however, implies that irrationalities in the price system are being retained and that distortions in resource allocation will
persist.
But there is no easy way out of this tangle. In a nutshell, the Chinese economy is still likely to operate within some constraints in form of price controls, like a bird in cage, though a newer and larger cage may be built as the bird becomes too big to
be accommodated in the former smaller cage. However,
it is unlikely that China will return to the old system of complete price control because it would be difficult for it to re-centralise its production and distribution system after years of partial liberalisation. The hopes are that in the longer run, China will strengthen its macro-economic controls over the aggregate levels of demand and supply, and also ease the bottlenecks so that some of the fundamental causes of inflationary pressure can be removed. However, these improvements will not be easy to achieve.
Economic Analysis Division Economic Services Branch Government Secretariat 5 June 1987
G.F. 326
CONFIDENTIAL #B