TNAG-1624-FCO40-2238-Relations-between-Hong-Kong-and-China-1987 — Page 196

CONFIDENTIAL # 3

CRC INF 14/87

(CEC 8/87)

Introduction

China's foreign exchange control

and its external sector balance

Foreign exchange control is usually regarded by

policy-makers in China as an absolute requirement, on the presumption that the Chinese economy could not survive if it were deprived of the protection offered by such control. Many Chinese leaders and economists are probably aware of the shortcomings and inefficiencies associated with foreign exchange control, but none of them would risk

making the Renminbi a freely convertible currency, in view of the profound impact this could have on China's socialist economic system. This paper examines China's foreign exchange controls, its external sector balance and their implications for the Hong Kong economy.

China's foreign exchange control

2.

(i) Background

Ever since the establishment of the People's

Republic of China (PRC) in 1949, foreign exchange earnings

and expenditures have been put under centralised state

control. Apart from being a key feature of any centrally planned economy, this tight foreign exchange control was a consequence of the painful experience of unrestrained monetary expansion, hyper-inflation and rapid currency

G.F. 326...

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