TNAG-1623-FCO40-2237-Relations-between-Hong-Kong-and-China-1987 — Page 193

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46.

There is some uncertainty regarding the extent

to which the programme of economic reforms in China will be affected by the recent political campaign against "bourgeois liberalisation". There is as yet no sign of China reversing its economic reforms, but the speed of reform, particularly in the sensitive but important area of price reform, appears to have slowed down.

It may,

nevertheless, be argued that this slow-down would have

occurred in any case, given the problems that have been

created in the process of the reforms. Any delay in price reform will tend to prolong the serious economic

inefficiency which exists in China because of the

resultant distortions in resource allocation.

absence of a rational price system, efforts to promote rational decision-making among individuals and enterprises

will tend to be frustrated.

47.

In the

Chinese leaders have on many recent occasions emphasised that China's open door economic policies will

not be affected by the recent political events. But it

will take some time before the validity of such assurances

can be fully assessed. In respect of foreign trade, an encouraging development in 1986 was that the visible trade deficit was brought under control, although its absolute

size remained substantial. China seems unlikely, however, to relax its controls on imports and on foreign exchange spending in the near future.

48.

Against the background of China's import controls, Hong Kong's domestic exports to China grew

strongly in the third and fourth quarters of 1986, while re-exports to China rebounded sharply in the fourth

quarter. A large part of the growth was apparently related to exports in support of outward processing activities and industrial investment in China involving

G.F. 326

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