TNAG-1622-FCO40-2236-Relations-between-Hong-Kong-and-China-1987 — Page 23

CONFIDENTIAL

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6. The export picture (para 12) is quite encouraging given the fall in oil and product revenue during 1986. However the first quarter picture for 1987 (para 18) may be misleading. Peking 'Liaowang'

cited in SWB 6 May states "It will

be difficult to maintain

the high growth rates of exports and foreign exchange earnings of the first quarter for many reasons. (No details are given).

7.

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[1

...

The import projections cited in para 20 are valued at the prices

assumed to prevail in 2000 (not, as stated, those of 1985). This is

based on assumed growth in import volume of 7-9%, and a

correspondingly high export growth so as not to give an untenable borrowing requirement. (The assumptions on world trade made in the IBRD Report are more optimistic than the growth rate expected now for the next 2-5 years). In response to the 1985 deficit, there has been a fall in import volume during 1986 expected to continue during

1987. This reflects foreign exchange stringency and means that

whatever the long run prospects, British industry attempting to sell

on unsubsidised terms may find the Chinese market less than promising for the next few years.

The

8. State-owned enterprises (ie large and medium-sized enterprises

contributing the bulk of industrial production) now rely on the

state budget for only about 25% of their funds for investment in

fixed assets compared with around 80% before the reforms began.

rest is made up from self-generated funds and cheap bank credit.

This has made enterprise activity very difficult to control. The

state has yet to devise a means of controlling enterprise activity

under the new conditions, hence the recurring problems of

overheating and dissipation of already scarce resources. This is

the central dilemma of industrial reform. A method of combining increased local, market-orientated activity with planned management of the economy will have to be found if the present reform strategy

is to become viable. Enterprises are not subject to market

discipline and there is now a vacuum where the central planning

system used to be. What is sometimes taken to be reinvigorated,

freer economic activity is often little more than anarchy. No developing country can afford to pursue such a wasteful strategy for

long.

/9.

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CONFIDENTIAL