G.F. 326
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FEC, although nominally equivalent to the RMB, was also
functioning in effect as foreign currency. The only way to
control the currency black market would be to revert to the
former strict system where foreign exchange spending was
limited to a tiny number of State outlets. There had however
been some tightening up of control in Shenzhen where there was
a huge difference between the official and black market rates.
20.
All of this pointed towards the need for a sizeable
devaluation. However, it was unlikely that this step would be
taken and, given the absence of true price signals, devaluation
would probably not have the same beneficial effects as it might
in a Western economy. Although it would be possible to
introduce total convertability, and thereby force through changes to the price system, the shock to the economy would be unacceptable politically. Thus the present pattern was likely
to continue for the foreseeable future, with a series of
"half-way houses".
21.
Finally, DS (ES)2 noted that China had considerable foreign debts and was now facing difficulties because these were largely denominated in Japanese Yen. The Chinese had
failed to match up their income and outgoings in the same
currency. They had learned an expensive and painful lesson,
and were likely to be more cautious in future.
22.
The meeting noted the paper and agreed that copies
should be sent to the FCO, Peking and the British Trade
Commission.
Action: Secretary
REPORT ON SA/HE'S VISIT TO GUANGDONG (CRC 16/87)
23.
CS noted that members with a direct interest had
already seen the full report. The Governor had enquired about follow-up. CS anticipated follow-up on three levels:
CONFIDENTIAL **