TNAG-0742-FCO40-946-Relations-between-China-and-Hong-Kong-1978 — Page 109

China's total trade with Communist countries remained about the same

as in 1975, increased trade with the USSR, Romania and Bulgaria being offset by reductions elsewhere. Romania remained China's largest Communist trading partner. The apparent surplus on trade with Communist South-East Asia and North Korea continued to offset the deficit with the USSR and Eastern Europe, although a proportion of this may be on concessional terms.

Outlook

Although the economic situation is improving and prospects appear good, the Chinese leadership still faces difficulties. Reconstruction after the earthquake will continue to make a demand on national resources, and there will be a continuing need to conserve fuel and energy, particularly electricity.

The new economic policies, too, may create new problems. Agricultural modernisation could raise questions of rural unemployment. Wage increases and price adjustments will need to be balanced carefully against the allocation of resources to trade and investment to avoid inflationary growth in personal consumption at the expense of exports and increased imports, though some real improvement in general living standards seems essential to maintain worker morale and cooperation.

At the Fifth National People's Congress in February/March 1978, Hua announced a massive capital investment programme for the next eight years. He said the State planned to build or complete 120 large-scale projects, including 10 iron and steel complexes, 9 non-ferrous metal complexes, 8 coal mines, 10 oil and gas fields, 30 power stations, 6 new trunk railways and 5 key harbours. Agricultural output is planned to rise annually by 4-5 per cent and industrial output by more than 10 per cent. Hua said that by 1985 steel output should more than double to 60 million tons a year and grain output rise to 400 million tons.

An important factor will be the leadership's interpretation of "self-reliance". The Foreign Trade Minister confirmed in October 1977 that a more positive and flexible attitude would be adopted towards foreign trade and particular attention paid to the acquisition of modern technology to meet the needs of economic development and modernisation. But he indicated that foreign trade would still be viewed as subordinate to political objectives, particularly in developing cooperation with the West to the detriment of the USSR. The new trade agreement with the EEC will create goodwill and provide a framework for future trade negotiations, but essentially will have political rather than economic value.

The Chinese apparently wish to preserve a balance between the principle of self-reliance and the need for funds to finance imports of foreign technology, but there are recent indications that they are adopting a more flexible attitude towards trade financing. In the past, the Bank of China has occasionally borrowed on a very short-term basis from British and other banks. The Chinese intend to increase their use of these deposits to finance imports. They also plan to widen their use of project-related deferred payments and surplus credit, and are seeking more favourable terms. As yet they have refused to accept buyer credit or government to government loans.

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