TNAG-1836-FCO40-2611-Executive-Council-of-Hong-Kong-memoranda-and-minutes-of-meet-1989 — Page 141

XCX (89) 3

Measures undertaken by the

Chinese Government to combat inflation

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As suggested in the previous note, the Chinese Government has had to fall back largely on administrative devices to combat inflation. Apart from their possible negative impact on confidence, these devices are not expected to be fully effective and may not be very

be very refined in their impact. Following the 3rd Plenary Session of the 13th Party Central Congress at the end of September 1988, there have been repeated calls from the State Council for authorities (at various levels) and enterprises to tighten their

their belts

belts by cutting both recurrent and capital expenditure. Such calls for restraint are unlikely to be fully effective as provincial and county officials often ignore or evade instructions from the central government.

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The People's Bank of China (PBOC) has also repeatedly emphasized the need

the need to curb excessive growth in loans. But again most of the restraint measures consist of blunt administrative devices which do not distinguish financially viable projects from non-viable

There has been little mention of the use of economic means, such as higher interest rates, to contain the

the growth in loan demand. The Chinese authorities face a dilemma in this aspect. Increased interest rates would add to the burdens of ailing state enterprises which might demand an increase in state subsidies or use their monopoly power to obtain higher prices. On the other hand, if interest rates remain at their current low level they are still only 9% for general loans, despite an increase of slightly more than one percentage point on 1 September 1988 enterprises will have little incentive to reduce their use of funds. Not only

only is

is there an almost insatiable demand for investment funds, but there is also a tendency for enterprises to demand more loans for working capital whenever there is an increase in production costs.

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The fact that China is still predominant ly a cash-based economy may make it easier for the PBOC to establish a more effective control over the money supply (which is to a considerable ext ent currency in circulation). Above quot a loans extended by Chinese banks, if not covered by increased deposits from enterprises or individuals, have to be validated by the PBOC. The excess lending is then financed by printing new notes. If the PBOC wanted

wanted to assert it self as China's central bank, it could clamp down on the current

current high rate of inflation by refusing to validate above quot a lending. However the ability or willingness of the PBOC to pursue an independent monetary policy must be in doubt. It has long been influenced by the Ministry of Finance and has probably become too accustomed to its traditional role of being cashier to the Chinese Government and allocating credit by means of administrative devices or according to instructions.