CONFIDENTIAL
2
2.
Notwithstanding this general reflection on the problem of governing the Chinese people, the first half of the year
a continuation of the mood of confident advance of the bold reforms set by the 13th Party Congress in October 1987. The top leadership was re-adjusted, with a further removal of conservative veterans and their replacement by others more amenable to the new ideas. The economy was still growing quickly but manageably. Indeed, at the year's end the cash and foreign exchange reserves are standing at 18 billion US dollars, with an economic growth rate over the year of above 11% and with a creditably small debt service ratio of about 9%. In the early summer, senior leaders were calling for pushing ahead with reform policies despite all the risks, including the possibility of social unrest. But just as Chinese claims to world brotherhood were damaged by latent xenophobia in Nanjing, so in the summer panic buying and bank runs in Shanghai shook the confidence and determination of Peking's economic managers. Urban communities were disturbed by the overheating of the economy, mounting inflation and increasingly unfair income distribution. Social morality declined with evidence of speculation, racketeering, corruption and more crime.
3. The debate these developments engendered among the leaders came to a head during their annual gathering at the seaside town of Beidaihe. There were reports of heated, if inconclusive, discussions and harsh criticism of Zhao Zhiyang, who was rumoured to have lost his responsibilities over economic matters. The reality fell somewhat short of the "Doomsday" reports in the Western media and most commentators failed to make allowance for the separation of powers between Party and government ie the different roles of Zhao and Li Peng. After some hesitation on the respective weight to be given to price reform and economic stabilisation, the latter was accepted as the priority. As the year ended, the State Council had taken a series of measures aimed at easing demand pressures and restoring consumer confidence. The package included the post- ponement for eighteen months to two years of price reforms scheduled for late 1988 and 1989, and stiff curbs on non- productive capital construction.
4.
The stabilisation effort centred on moves to contain credit. Financial management had continued to be troublesome during the year. For too long, loan ceilings suggested from the centre have been ignored at the provincial and local levels. The centre is now trying to enforce them. The extent to which the Chinese authorities can restructure economic decision-making through direct controls remains far from clear. In practice it depends on how far the provincial and local governments can be compelled to yield back to Peking power which they have tasted and enjoyed. During 1989, the Chinese Government will have the difficult job of reasserting control over inflation by means
CONFIDENTIAL
/which
No comments yet.
Private notes are available after approval.