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a very large visible trade deficit (it even had a trade deficit with Hong Kong, of US$884 million) amounting to US$6.41 billion, and its foreign exchange reserve declined by about US$3.6 billion to US$10.85 billion by the end
June 1985 (equivalent to less than 4 months' worth of imports at the level then prevailing).
21.
The sharp deterioration in the foreign exchange reserve position was a reflection of China's apparently insatiable appetite for imports, particularly of consumer goods, as well as its inefficient foreign exchange control | system which was full of loopholes under the decentralized
trading system. Once the authority to use foreign
exchange was decentralised and the restrictions on imports were eased, local authorities grasped every opportunity to import foreign goods using the foreign exchange retained rightfully by them or acquired from other sources through
legal or illegal means. The special economic zones and Hainan Island provide good examples of the problems that emerged. In the first half of 1985, they accounted for
US$1.4 billion of the national visible trade deficit of
US$6.41 billion. Endowed with large-scale import privileges, Hainan Island imported vehicles with a value
totalling US$1.5 billion between January 1984 and March 1985. This was about 43 times its original foreign
exchange quota. (The additional foreign exchange was reportedly acquired from other local authorities through
transactions which were not wholly legal.) Most of these vehicles were intended for resale to other parts of China at great profit.
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