TNAG-1621-FCO40-2235-Relations-between-Hong-Kong-and-China-1987 — Page 116

CONFIDENTIAL #3

5.

To some extent, the slowdown in the growth rate of capital construction has helped to alleviate the pressure that aggregate demand was imposing on the aggregate supply of resources, and hence on the general

price level. Also, as a consequence of a tightening of credit, many enterprises were left with insufficient working capital, implying that less funds were available for workers' bonuses. This has had a dampening effect on

consumption. As a result, the rate of increase in consumer prices, according to the official estimates,

slowed down from 7.5% in the first quarter to about 3.5% in the second and third quarters

6.

(3).

The easing of the inflation rate in the second and third quarters was largely achieved through containing

the growth in demand, which was in turn facilitated by a contraction in the money supply (in the first half of

1986, about Rmb 6.5 billion was withdrawn from

circulation). However, in the longer term, the only means to achieve the dual objective of raising living standards and maintaining a balance in supply and demand is to increase the productive capacity of the economy and to ensure that it is used efficiently..

(3)

In September, price controls over certain commodities

and industrial goods were relaxed.

As a result,

fluctuations in the price of these commodities

occurred in some places in China.

G.F. 326

CONFIDENTIAL ##