TNAG-1623-FCO40-2237-Relations-between-Hong-Kong-and-China-1987 — Page 132

CONFIDENTIAL # 2

CRC INF 10/87

(CEC 5/87)

Price reforms in China and their implications

for the Chinese economy

Introduction

There is little doubt that China's irrational

price structure, which leads to serious distortions and disruptions in resource allocation, is a major obstacle to

economic efficiency. This is especially serious when the

power to make economic decisions is decentralized and

delegated to the lower levels of the bureaucracy or to

individual enterprises and when China's economic reform programme is making inroads into the urban and industrial

sectors. To a considerable extent, successful price

reform is a prerequisite for the success of the entire

economic reform programme.

China's price system prior to the reforms and the causes

of price irrationality

2.

Prior to the economic reforms launched in late

1978, China was in practically all respects a centrally

planned economy. The three fundamental questions of 'what to produce', 'how to produce' and 'for whom to produce'

were resolved by the central authorities. Activities

related to the production and distribution of most goods

and services were under centralised control and regulated

by state plans. Under this system, prices were relegated

to being merely units of account and a means to distribute

income among the different economic units.

These, in

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CONFIDENTIAL #3