TNAG-1624-FCO40-2238-Relations-between-Hong-Kong-and-China-1987 — Page 34

G.F. 326

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QUARTERLY REPORT ON HK/CHINA ECONOMIC RELATIONS (CRC 13/87)

10.

DS(ES)2 introduced the paper, noting that the Chinese

economy was continuing to grow very rapidly. Despite the

well-known bottlenecks, national income was growing at around

10% p.a.

There were signs of overheating. The official

estimate of 6% inflation was a gross underestimate, (the real

rate was probably in double figures). The Chinese authorities were worried by this, and had shifted the emphasis from price

reform (which would mean higher prices) to reform of the

enterprise management system. However, it was difficult to see this succeeding without price reform.

11.

Exports had increased very rapidly and imports had

fallen. Taking invisibles into account, the current account was practically in balance. Trade with Hong Kong had witnessed very large growth rates, (principally because of outward processing activities). Guangdong was the star performer in the Chinese economy, with both exports and income growing

faster than elsewhere. However, problems of overheating were becoming evident, particularly in Canton where the shortage of

electricity supply posed difficulties. There had also been a general slow down in foreign investment, as disillusionment with Chinese policies and attitudes grew. Hong Kong maintained the largest share of foreign investment, but this had slowed

too.

12.

CS referred to para 5 of the summary concerning the

shift from price reforms to reforms of the enterprise

management system. He noted that there was still no effective bankruptcy provision. Without this final sanction, he wondered how close the Chinese were to real managerial reform. DS(ES) 2 replied that the move away from price reform was also a move away from managerial reform. With the present irrational price structure, an inefficient firm might be profitable, while an

efficient firm might not be, because it was tied to high raw

material costs and low output prices. Although the bankruptcy

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