TNAG-1624-FCO40-2238-Relations-between-Hong-Kong-and-China-1987 — Page 167

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CONFIDENTIAL #3

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With the adoption of the responsibility system, managements of enterprises are expected to handle fluctuations in product prices and in material costs more independently. However, given the erratic supplies of raw materials in China and the fact that managements of enterprises do not have much freedom in adjusting the price of their products, it is very difficult to hold them entirely responsible for the levels of their profits or losses. It is therefore not surprising that the responsibility system has encountered resistance from a number of state enterprises, and that progress so far has been less satisfactory than expected.

From the

macro-economic point of view, even if enterprises are granted full autonomy in production, rational economic decision making will not be possible unless the irrationalities in the price structure are removed.

10.

Turning to the external sector, the growth momentum in exports was maintained in the second quarter of 1987. According to China's Customs statistics, the value of exports rose by 21.7% in the second quarter of this year compared with a year ago. The value of imports in the second quarter, on the other hand, registered a year-on-year decline of 7.7%. For the first half of 1987 as a whole over the same period last year, exports grew by 24.3% to US$16.6 billion, while imports fell by 6.2% to US$18.6 billion. In consequence, there was a visible trade deficit of US$2 billion, which compares favourably with a deficit of US$6.4 billion in the first half of 1986. On the other hand, figures released by China's Ministry of Foreign Economic Relations and Trade (which are considered less reliable for macroeconomic analysis) indicate that a trade surplus has been achieved during the first seven months of 1987. According to this source,

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