TNAG-1053-FCO40-1303-China-and-Hong-Kong-Working-Group-1981 — Page 49

UK CONFIDENTIAL

New Measures

8.

The Chinese leadership are responding to this lack of progress in a number of ways:

by imposing severe restrictions on capital construction projects;

by freezing the prices of certain goods and tightening price controls in general;

by tightening control over credit and currency issue;

by making a major drive to prune administration costs and waste;

by formally extending economic readjustment to 1983 or even 1985;

by slowing down some aspects of reform of economic management and re- emphasising the role of central controls and planning in general.

In addition the 1981 annual plan and budget is being redrawn and the restrictions on capital construction will apparently not be relaxed to any major extent until this has been done. The new policies have not been announced as a new package as happened in 1978 and 1979, and just how far the Chinese are proposing to go in holding back reform is not yet clear.

Outlook

9. All large and medium sized projects, including those involving foreign participation, are now being examined on a case-by-case basis: several large (mainly Japanese) projects and joint-ventures, particularly in petrochemicals and steel, have already been delayed or postponed indefinitely. We believe the Chinese intend that projects which are not immediately necessary, or are ex- cessively expensive, or for which raw materials and infrastructure cannot be guaranteed, will be cancelled or postponed. Outside the priority areas of energy and transport, imports of capital goods will probably be kept to an absolute minimum. It seems unlikely that this review will affect many contracts which have already been signed and Chinese officials have indicated that current defence contracts with overseas suppliers are safe. We have no evidence that in recent years the Chinese have broken contracts, although they have occasionally used "escape" clauses or insisted on renegotiation. Chinese sources have however been emphasising the importance of maintaining foreign confidence in China's good faith in business dealings.

10.

There have been no indications of the views of the military on the economic policy changes. The declared defence budget* for 1980 was 13 per cent down on 1979 although this was still up on 1978 actual expenditure. At the National People's Congress Yang Dezhi, Chief of the General Staff, said that the military accepted the need for the reduction in spending, in the light of the country's overall economic goals, although he also referred to the need for increased military expenditure in future. We suspect that total defence expenditure in 1980 was probably intended to remain stable, as it has probably been for some years.

But

Note

*

We believe that defence equipment procurement, capital construction and r & d is excluded from the published figure.

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UK CONFIDENTIAL