CONFIDENTIAL #
(d)
22
Possibility of hyper-inflation and danger
of social unrest
37.
Notwithstanding the current high rate of
inflation in China, the chance of its developing into
With the hyper-inflation does not seem very great.
production and distribution system remaining intact (in fact since 1978 there has been a sustained period of continuing rapid growth in output in almost all economic sectors) and with the growth rate of money supply not totally out of control, China's rate of inflation is high but seems unlikely to get completely out of control. Extensive wage indexation, which could lead to a
wage/price spiral, would increase the chance of
hyper-inflation. China would thus be unwise to take more than limited steps in this elevation.
38.
Although the chances of hyper-inflation seem slim, a sustained period of double-digit rate of inflation is quite likely. This would, by itself, be a highly undesirable situation. Even an inflation rate of between 10% and 20%, coupled with widening gaps between incomes in different localities and trades and the absence of a
comprehensive social security system, could still lead to
social unrest. Here China has an advantage over most
other developing countries in having a loyal military and a public security system with a long history and efficient track record. In the last resort, the bureaucracy may be
able to rely on coercion to prevent unrest. But to
acheive this the government may need to adopt an authoritarian and conservative policy stance resulting in the pace of economic reform being generally impaired. Some of the progress already made might be undone.
C.F. 326
CONFIDENTIAL #3