CONFIDENTIAL # 3
20
external trade sector relative to that of its economy is already quite substantial (footnote (18)). The adoption
(22) of the Coastal Region Economic Development Strategy is likely to provide added stimulus to China's external
trade growth.
34.
But in view of the inflationary pressure arising from the present over-heated state of China's economy, it is unlikely that the current high growth rate in exports can be sustained for much longer. Domestic inflation is likely to have the effect of shifting resources to the domestic sector from the external sector, unless the differential rates of inflation between China and its major trading partners are offset fully by the depreciation of the Renminbi or exports are even more heavily subsidised.
35.
It is unlikely that the extent of adjustment for differential rates of inflation offered by the black market and, to a lesser extent, the government sanctioned foreign exchange adjustment centres can be sufficient as a significant proportion of the foreign exchange earnings derived from export activities has to go through the official conversion channel. Domestic inflation has
increased the Renminbi cost of every US dollar of
(22) This strategy emphasizes that coastal provinces should adopt external orientation as their main policy and that imports will be tolerated or even encouraged if they are necessary for successful export activity.
G.F. 326
CONFIDENTIAL # Z