TNAG-1457-FCO40-1981-Relations-between-Hong-Kong-and-China-1986 — Page 13

CONFIDENTIAL #

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10.

Invisible trade appeared to be a more promising source of foreign exchange earnings for China. In the

first quarter of 1986, the surplus on the invisible trade account amounted to US$1.16 billion, which was sufficient

to cover about 40% of the visible trade deficit (at

US$2.93 billion).

11.

Reflecting the substantial deficit on the visible and invisible account in the fourth quarter of 1985, China's foreign exchange reserves fell by 5% to US$11.9 billion at the end of December 1985, compared with September 1985. Of this sum, US$2.6 billion were state

foreign exchange reserves and the other US$9.3 billion

were reserves of the Bank of China. In addition, China's gold reserves stood at 12.67 million troy ounces (or 400

tonnes) as at the end of 1985. Outstanding loans from

foreign sources stood at US$5.1 billion.

12.

As regards foreign investment, the requirement that joint ventures be self-financing in terms of foreign exchange remained a thorny issue which attracted great attention. In January 1986, China issued the Regulations on Joint Ventures' Balance between Foreign Exchange Revenue and Expenditure. The regulations state that Sino-foreign joint ventures should export as much of their products as possible with a view to achieving foreign exchange balance. Preferential treatment, in the sense of allowing the sale of a certain proportion of the output in the domestic market, will only be given to joint ventures producing sophisticated products with advanced technology and to those producing high quality products which are at present imported into China or which are urgently needed. The foreign exchange balance plans of such enterprises will have to be approved by the State Planning Commission or its respective local planning commissions. Provisions