TNAG-1458-FCO40-1982-Relations-between-Hong-Kong-and-China-1986 — Page 103

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Planning Staff

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DESPATCH FROM PEKING: ECONOMIC REFORM IN CHINA

1. Your minute of 30 September to Dr Wilson sought comments on Sir Richard Evan's despatch, and Rod Wye's memorandum, on the Chinese economic reform.

2.

Both provide a useful summary of the development of the reform programme and an analysis of problems and prospects with which most would agree. I would agree with the broad conclusions about support for the reforms and likely difficulties.

General

3. Rather than summarise the main themes again I will restrict myself to some comments on your para 3, before offering some more detailed remarks.

4.

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I am not sure that your second reason for slower future progress that is recourse to administrative control

is necessarily to be regretted, since as Mr Wye notes, there has been no alternative. Potential chaos has been quickly averted as the authorities have realised that the economy is not sophisticated enough, and faces incorrect price signals, for some forms of decentralisation to achieve their ends.

Tf

5. The third factor - unwillingness to borrow - may be well- founded. Non-economic prices and the separation of most Chinese production from the influence of world prices on profitability means that accurate appraisal of projects is difficult even in less distorted economies there is no shortage of investments whose returns have not been able to cover their debt servicing costs. this attitude, and difficulties in exporting, mean lower imports of technology possibly unsuitable it is not clear that this need slow growth. Where technology has been successfully assimilated this has so far been rather limited - both sectorally and geographically. Given low levels of productivity and capital there should be great gains to be reaped from transferring successful techniques throughout the economy, but again for this to be achieved efficiently via market mechanisms requires correct pricing and hence profitability with freedoms for resources to follow these signals.

6.

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I am not sure that at present central planning remains simply as a matter of political expediency. Planning still has a predominant role in the economy because - at current prices shortages of vital industrial inputs require quantitative allocation for the system to function at all. "Market forces" require an

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