TNAG-1458-FCO40-1982-Relations-between-Hong-Kong-and-China-1986 — Page 111

CONFIDENTIAL

3.

However, the thrust of the despatch is that future progress will not be as easy as the progress already made. The principal reasons cited by the despatch are essentially: first, as might be expected, the easiest

gains have already been banked (the dead weight of the agricultural commune system offered much more room for quick improvement than the complex structural difficulties to be found in the industrial sector);

second, the leadership's reflex is to fall back on the very methods which the reform programme is designed to eliminate (although this difficulty might presumably be removed as familiarity with reform grows); third, an unwillingness to borrow; fourth, some degree of unwillingness by foreign investors to do business in China, in part because of sizeable disincentives placed in their way by the Chinese (Deng Xiaoping clearly showed some appreciation of this when he commented recently that "if we are to persuade foreigners to invest in China, we must let them make money"); and finally, political

constraints. As in any country, political factors are

bound on occasion to interfere with the smooth

implementation of economic policies. For China, the "preservation of socialism" has meant retaining some degree of central planning when decision-making might

best be left to market forces. It has also meant that the leadership have softened campaigns to improve allocative efficiency in order to ensure that certain groups do not suffer excessively. This includes keeping employment as a target rather than purely as a variable, and some linkage between wages and prices, both of which can fuel inflation but not necessarily promote reform.

FC2AAR

CONFIDENTIAL