TNAG-1458-FCO40-1982-Relations-between-Hong-Kong-and-China-1986 — Page 120

CONFIDENTIAL

March this year. As for the future, the control of inflation

is likely to prove hard to achieve. The improvement of the

allocative efficiency of the economy will require that supply

and demand should be more closely matched and this, in turn,

will require that many prices should rise (either through their

decontrol or through the raising of administered prices). In

addition, the steady depreciation of the Renminbi against all

foreign currencies will raise the price of imports in domestic

currency terms.

The leadership would like to

12. A third condition, also made clear to the IMF's Article

IV consultation team in 1985, is to prevent any fall in living

standards. The rapid growth of the economy has ensured, and

ought to continue to ensure, an increase in average income per

head. But there are some groups, such as officials in central

and local government, whose standard of living has been squeezed

between a fairly high rate of inflation and a low rate of

increase in wages and salaries.

prevent any further squeeze by bringing the rate of inflation

under control. But the drive to improved allocative efficiency

could militate against this; and, if food prices were to rise

again and rents were to go up, the leadership would need to

compensate for these price increases by raising salaries and

wages. This could mean that what was gained in the national

budget through a reduction in food and housing subsidies was

lost through increased expenditure on the remuneration of state

employees.

CONFIDENTIAL

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