TNAG-1623-FCO40-2237-Relations-between-Hong-Kong-and-China-1987 — Page 69

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19.

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CS thanked EAD for another useful paper, and for including more analytical points. The paper would be forwarded to HE, and copied to London, Peking and the British Trade

Commission.

Action: Secretary

PRICE REFORMS IN CHINA AND THEIR IMPLICATIONS FOR THE CHINESE

ECONOMY (Paper 10/87)

Bigger

20. DS(ES)2 introduced the paper, noting that in the past the

Chinese price system was inefficient and unresponsive, creating bottlenecks in the economy. Changes began in the

mid-1970s with liberalisation of some less important

commodities, although control of strategic commodities, (e.g. iron, steel, raw materials) remained strict.

changes came in 1984 when wider margins for price

fluctuation were allowed. These were intended to improve

efficiency and ease bottlenecks, but had unwelcome

short-term effects on vested interests, (especially

inefficient state enterprises which had previously been

cushioned through low prices for raw materials and high product prices. These were now making losses and needed

to be bailed out by the state); and on households, (where

demand exceeded supply and so inflationary pressures

became more open).

21. DS(ES)2 pointed out that price subsidies in various forms

(e.g. housing, foodstuffs) were now more evident than

before in China's State Budget. There were increasing

signs of concern about social stability and there was

likely to be pressure for slower change. The "stop-go"

nature of price reforms looked set to continue. There would be short-term trade-offs (the need to appease vested

interests and pacify households) against the long-term

improvements to economic efficiency. The long-term

improvements depended on the pace with which resistence

could be overcome.

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