G.F. 326
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16.
CS enquired about difficulties in agriculture. DS(ES) 2 said that there had been clear drops in output,
particularly of rice as there had been a shift to cash crops.
The profits were not being ploughed back into the land, but
were rather being used on house construction. There were few
incentives to invest in e.g. irrigation, partly because land leases were not long enough.
17.
The meeting noted the paper and agreed that it should be forwarded to the Governor and copies sent to the FCO, Peking
and the British Trade Commission.
Action:
Secretary
CHINA'S FOREIGN EXCHANGE CONTROL AND ITS EXTERNAL SECTOR
BALANCE (CRC 14/87)
18.
DS(ES)2 introduced the paper, noting that exchange control was historically a part of the central planning system. The difficulties posed by the pricing system meant that exchange control could not simply be wiped away. A free
flow of capital would require a major shift in the exchange
rate as the RMB was overvalued. Price signals did not function
properly in China, partly because various enterprises were so
closely linked together. In sum, the Chinese authorities could
not abandon foreign exchange control, although the system was very slowly being relaxed.
19.
DS(ES) 2 pointed out that there appeared to be relative
tolerance of the black market. The Chinese authorities
accepted a certain amount of leakage from the system,
principally because they simply could not prevent it. Simiarly, they were powerless to prevent the circulation of
foreign currency, particularly in southern China and particularly Hong Kong dollars, 20% of the note issue of which
was estimated to be circulating in Guangdong. In addition, the
CONFIDENTIAL # 3
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