CONFIDENTIAL
But it now looks as if China will have to accept deficits on her trade and current accounts throughout the period of the Seventh Five Year Plan (1986-1990) if she is not to cut planned levels of imports. Productivity and profitability in industry both fell, the latter sharply. Inflation remained a problem. The official cost-of-living index rose by only 6%. But retail prices in general undoubtedly rose by a good deal more, as did wholesale
prices.
A
7. A good deal took place in the field of economic policy. provisional bankruptcy law and a personal income tax law were enacted. Regulations to create better conditions for foreign investors and to introduce a system of employment by contract were issued. Enterprises began to issue bonds and shares for purchase by Chinese investors. The prices of nearly 500 more consumer goods were adjusted, though not decontrolled. But the year ended with a declaration by Chen Muhua, the Chairman of the Central Bank, that China must avoid "total westernisation". So limits had
been set before the fall of Hu Yaobang.
China: External
8.
Externally, the most important event of the year was probably Gorbachev's speech at Vladivostok in July. Although there were few concessions in the speech, its message was that the Soviet Union wished to mend fences with China. China had been sitting fairly comfortably on the position that there could be no "normalisation" of relations with the Soviet Union until the three obstacles of
Soviet support for Vietnam in its occupation of Cambodia, the powerful Soviet military presence in Mongolia and Siberia and the Soviet occupation of Afghanistan had been removed. speech created a new situation.
Gorbachev's
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CONETDENTIAL
19.
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