TNAG-1624-FCO40-2238-Relations-between-Hong-Kong-and-China-1987 — Page 197

G.F. 326

CONFIDENTIAL 3

2

depreciation(1)

during the late 1940s under the

Kuomintang regime.

3.

Because of fears that the chaotic situation in

the late 1940s might recur and threaten the stability of

the communist regime, China has adhered strictly to its

framework of centralised control on the use of foreign

exchange. There appears to be a general consensus among

the Chinese economic policy-makers that unified

administration of foreign exchange by the State Council

can ensure that China's external sector balance is kept

under control and that its ability to service external

debt is not eroded. This is regarded by them to be of

utmost importance because China, like many other

developing countries, is short of foreign exchange and

hence the country needs to make the best use of such

scarce financial resources. Also, the Chinese leaders

think that unified administration of foreign exchange can

help to promote orderly trade and create favourable

conditions for foreign investment in China. The

shortcomings caused by the foreign exchange controls have

tended to be under-estimated. These shortcomings include

inefficient allocation of foreign exchange resulting in

wastages in some sectors and loss of business

opportunities in others, distortions in the industrial

structure and in the prices of internationally traded

versus non-traded goods, the development of dualistic

foreign exchange markets, and the need to maintain a large

bureaucracy in administering the controls.

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(1) It was reported that when a new Chinese yuan,

supposed to be backed by gold, was issued in 1948, the exchange rate in the morning of the day of issue was one new yuan to six Hong Kong dollars. But by the evening of the same day the rate had reversed itself, to one Hong Kong dollar to six yuans.

CONFIDENTIAL 機密