TNAG-1640-FCO40-2287-Economic-situation-in-Hong-Kong-1987 — Page 86

Foreign and Commonwealth Office

London SW1A 2AH

CONFIDENTIAL

Sir Richard Evans, KCMG

HM Ambassador

British Embassy

PEKING

Telephone 01-

270 2949

Your reference

Our reference

Date 26 June 1987

Dear Sir Reid,

CHINA: ECONOMIC

01 JUL

1. We were grateful to you for your telno 847 of 13 May, in which Ministers have shown a close interest and which we submitted to the Secretary of State ahead of his attendance at the Venice Economic Summit. The telegram provided a suitable postscript to your despatch of 8 September, which we had also submitted on receipt and which gave rise to a methodical reappraisal here of China's economy. This has been recently rounded off by a substantial Research Dept memorandum on Chinese economic reform (copied to Charles Parton earlier this year) and an assessment of economic reform in the JIC this week. This letter hopefully therefore completes the circle, with our thanks to you, Charles Parton and Rod Wye (whom we have been seeing here in London) for your seminal contributions.

2. The Chinese economy clearly had a reasonably good year in 1986. Substantial achievements include. respectable growth figures and an improved foreign trade picture (exports up by 13% with only a negligible increase in imports).

3. But deep-seated problems remain. The promising signs are offset by a failure to make progress on serious structural problems (principally the need for price reforms and the phasing out of subsidies), and the worrying trend for qualitative indicators, such as efficiency and profitability. The other major unresolved problem is where to strike the balance between centralisation and decentralisation in economic decision-making, in both industry and agriculture.

4.

China's leadership nevertheless shows a growing awareness of the economic problems ahead. But the magnitude of these problems, and in particular the inability to press ahead with price reform and resolve the question of where economic decisions are taken, mean that progress is slow and halting.

FC2ACL

CONFIDENTIAL

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