TNAG-1483-FCO40-2037-Economic-situation-in-Hong-Kong-1986 — Page 151

IN CONFIDENCE

MARKET ASSESSMENT EXERCISE 1986

MARKET: CHINA

British Overseas Trade Board

OB

SECTION I: Brief description of the type of market a) Political and economic factors

Politically stable. Economic reforms in recent years have led to fast growth in agriculture and industry but overheating and a large trade deficit in 1985 forced the authorities to take steps to curb the growth rate and restrain imports. Agricultural production is a key factor; excellent harvests have been achieved in recent years. Industry remains generally backward and inefficient and the infrastructure (energy, transport and communications) is inadequate. China has vast mineral and energy resources particularly coal and HEP - though still largely untapped. The search for offshore oil has yielded disappointing results and the oil price decline has reduced China's earnings from oil exports and led to a slowdown in onshore oil exploration. UK-China political relations good: Joint Declaration on Hong Kong signed December 1984. State visit to China in October 1986. UK has made available £300 million in low-interest development loans.

b) ECGD Assessment

ECGD takes a positive view of the China market. External debt and the debt service ratio are both relatively modest and are expected to remain within manageable limits at least during the period of the Seventh Five Year Plan (1986-1990).

c) Prospects for the future

Political stability is expected to outlast the death of Deng Xiaoping, though after his death there could be some slowing down in the pace of economic reform. During the 7th 5-year plan (1986-90) and beyond, China aims at achieving economic growth of 7 per cent a year on average, by continuing with internal economic reform and the open-door international economic policy, while avoiding a recurrence of economic overheating, and reducing the large trade deficit which appeared during 1985. Emphasis will continue to be given to improving China's infrastructure (especially energy, transport and communications) while gradually raising the living standards of China's people. There will be continued emphasis on technology transfer, joint ventures and compensation trade. China has been offered low-interest development finance by Japan and a number of Western countries, and there a large World Bank lending programme for China.

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China will also aim to expand its exports. The steady devaluation of the renminbi (RMB) over the last 2 years may help, as would a recovery in oil prices, but continuing international trade restrictions an (eg) textiles and clothing will have an adverse effect. In the long term China has the manpower resources to became a major economic force but, in the short term China's trade growth is likely to be steady rather than spectacular. The terms eventually negotiated for China's accesstion to GATT could have a significant impact on China's export earnings.