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CONFIDENTIAL
機密
File
Situation in China
CRC 6/89
The last report (CRC 15/88) discussed at the October meeting of the China Relations Committee, reported the conflict between further price reform and controlling inflation. has now been firmly resolved in favour of the latter.
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This
Li Peng's New Year message stressed that the current rectification policy was not at odds with economic reform. Tasks for 1989 included reducing the growth rate, giving priority to agriculture, examining ways to increase tax revenue and reducing inflation. It was noteworthy that the coastal development strategy continued to be mentioned.
3.
Although the economic rectification policy was introduced in September as a hurried response to the inflation problem, it has now developed into a longer term strategy. This has involved the addition of "adjusting the economy" to the process of stabilisation, the objective being that when the time comes to expand the economy it will be equipped to grow in a natural way.
4.
One of the few effective weapons available to Peking in restraining excessive demand is to increase interest rates.
On 25 January it was announced that interest rates would rise i
by 2.38 to 11.3%. This is still well below the inflation rate (even on the artificially low official figures). However some officials are beginning to voice fears that cutting back growth by controlling the money supply will result in stagflation.. Indeed the debate which China appears now to be about the depth to which the rectification campaign should go
5.
The change in policy does not seem to have had an adverse effect on Zhao's position despite reports that he had had to make a self-criticism in September over mis-management of the economy. He has however had to give up direct involvement in managing the economy and settle for the more
Li seems to normal functions of the Party Secretary General. have scored with the appointment of his supporter, Luo Gan as Secretary-General of the State-Council. But Zhao's continuing activity and the resilience of his pet coastal development strategy shows that Zhao is not to be underestimated.
Sino-Soviet Summit
6.
Following Shevardnadze's recent visit to Peking and Shanghai, the way is now clear for Gorbachev to visit in May. Although the Chinese have continued to refer to Cambodia as an 'obstacle', this (and their initial coyness over dates) is intended to maintain pressure on the Soviets and through them the Vietnamese, rather than to signal any major difficulties. Given the current international situation both countries see improved relations as being in their interest. It should be borne in mind that what is proposed is normalisation and not rapprochement.
CONFIDENTIAL ##