TNAG-1479-FCO40-2011-Future-of-Hong-Kong-despatches-1986 — Page 38

CONFIDENTIAL

4. By the autumn, the leadership had brought this crisis

under control. This was achieved by raising interest rates, by imposing credit rationing and by again ruling that all except de minimis expenditure in foreign exchange must be approved by the central authorities. But a price was paid. One part of it was retail price inflation of at least 10%. Another, stemming directly from this, was increased dissatisfaction among groups with fixed or slowly-rising incomes. A third was the interruption of some negotiations with foreign companies.

5.

Nevertheless, the performance of the economy was again on the whole good. The total product of society a measure of the gross output of agriculture, industry, construction, transport and internal trade - rose by 14%. The output of grain and cotton was down, but the output of almost everything else, including other cash crops, coal, oil, steel and chemicals, was up.

6. Despite many press reports to the contrary, China's external financial position remained strong. China's gold and foreign currency reserves were worth $16.6 billion at the end of September, as compared with $18 billion at the

end of 1984. China's official external debt was in the

neighbourhood of $4.5 billion and her debt service ratio was probably below 5%.

7. At a Special Conference of the Chinese Communist Party

in September, the economic reform programme was again endorsed. At meetings of the Central Committee, a lot more elderly people lost their places in the Central Committee, the Secretariat and the Politburo. Very few people who could be classified as critical of, or lukewarm about, the reform programme are now members of the Secretariat or the Polit-

buro.

CONFIDENTIAL

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