TNAG-1711-FCO40-2389-Future-British-Consulate-General-in-Hong-Kong-HMS-Tamar-1987 — Page 29

CONFIDENTIAL

3. Serious problems arose in 1985 and to a lesser extent

in 1986 including substantial trade and current account

deficits; excessive growth rates; acute energy and

transport bottlenecks; and inflation (officially 6% in

1986, in fact much higher). In part they were caused by

central control being relaxed too far and too fast,

without corresponding reforms in economic structures and

management methods. This allowed some enterprises, with

more funds at their disposal, to go on a spree of

investment in capital construction projects and to issue

large bonuses to their workers. Mismanagement

(especially of credit and financial policies),

corruption, and an irrational price system contributed to

the difficulties. Deng's critics blame his reforms. The

reformers reply that these problems highlight the need

for more radical changes: administrative measures (eg

planned output controls) must be replaced by more

sophisticated use of macro-economic levers, including tax

and interest rates and the exchange rate. Emphasis must

shift from quantity, to quality and profitability of

production.

4. 1985's large trade deficit of US $15 billion was

reduced to US $12 billion in 1986 and the sharp fall in

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CONFIDENTIAL