TNAG-1457-FCO40-1981-Relations-between-Hong-Kong-and-China-1986 — Page 88

Summary and conclusions

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34.

So far, the market-oriented urban reforms

introduced in late 1984 have had mixed results for China's

economy. On one hand, the initiatives of the enterprises

have been greatly enhanced under the new incentive

system. On the other hand, the de-centralization of

authority to the enterprises has led to problems like

runaway economic growth, massive capital construction and indiscriminate importation of foreign goods and technology well as corruption and fraud. China has thus been -

compelled to re-centralize in certain areas since mid

1985, and the remedial measures taken have so far made

some inroads though not without resistance. Economic

growth slowed down significantly in the fourth quarter of 1985, as did capital construction. The Chinese leaders

have indicated that in future, indirect controls relying on macroeconomic levers would replace direct administrative controls. Given that the operation of free

market forces is unfamiliar to most decision-makers in

China's economy and that its monetary sector is

particularly rudimentary, the success of such a change in

the type and nature of the regulatory mechanism remains to

be seen.

35.

According to figures released by the Chinese authorities, the decline in foreign exchange reserves was arrested in the third quarter of 1985. But if this improvement in the face of a growing visible trade deficit was largely due to deferred payments for imports, the

underlying problem remains unresolved. It is obvious that the import controls have not yet taken full effect. Rationalization in the use of foreign reserves is still a

prime concern of the Chinese leaders.

Relaxation of

CONFIDENTIAL &