JUN.11
'87 10:54 IMF WASH DC RAPICOM6300 477-7491
-6-
P.014
3.02. The introduction of extensive economic reforms in China has not been easy and the government continues to face difficulties in introducing reform, stimulating rapid growth and maintaining economic stability. In particular, China's previously comfortable balance of payments position deteriorated rapidly during the course of 1984 and 1985. The country's foreign exchange reserves fell to $13.2 billion by the end of 1985 (equivalent to 4.2 months of imports), and its current account deficit for that year was $12 billion (4.3% of GDP). As much of this was financed by foreign borrowing, China's external debt by the end of 1985 increased from $13.1 billion in 1984 to $20 billion in 1985, causing the country's debt service ratio (including short-term debt) to rise slightly to a still comfortable 8%. The government responded to the weakening foreign exchange situation by launching a strict stabilization program that aims to control imports and borrowing. It also includes further increases in interest rates, as well as a series of administrative directives governing bank credit and project approval. Furthermore, in July 1986, the Renminbi was devalued from Y 3.2 to the US dollar to Y 3.7, and a program to improve controls over external borrowing was introduced. As a result of the stabilization efforts, aggregate credit and investment, as well as new import orders have begun to slow and the 1986 balance of payments showed a small improvement over 1985.
3.03
In international trade and investment, China has been progressively opening up to the rest of the world since its "open door" policy was adopted at the end of 1978. This has rapidly increased China's exports of raw materials and manufactured goods, raised earnings from tourism and other services and permitted a dramatic increase in imports of capital goods, machinery, technology and materials in short supply through foreign direct investment. These changes have clearly helped to improve the efficiency of the Chinese economy. However, although various reforms in trade practices over the period were adopted by the State Council in September 1984, many trade practices, such as the pricing and administrative allocation of foreign exchange have remained essentially unchanged. Therefore, without further changes in the trade environment, it is quite possible that China's foreign trade growth will slow down, as the high rates of recent years primarily reflect the transitional effect of moving the country from almost complete insulation to a partly open, but by international standards still relatively inefficient foreign trade system.
FOREIGN INVESTMENT
3.04 As an investment company, CIC's main activity will be to provide financing for joint ventures in the PMC. However, as previously noted, CIC will have the capacity and flexibility to take up other financially attractive opportunities as they arise. Table 1 below provides details of foreign investment approvals in China in the period 1979-85.