TNAG-1873-FCO40-2661-Relations-between-Hong-Kong-and-China-1989 — Page 134

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CONFIDENTIAL

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機密

for working capital whenever there is an increase in production costs (15).

18.

(ii) Restraining the growth of money

supply (currency in circulation)

In attempting the difficult task of monetary

control, the Chinese authorities put great emphasis on the

need to restrain the growth of currency in circulation. Such a preoccupation with cash stems from the fact the

China is still predominantly a cash-based economy. In the

absence of a sophisticated banking sector, almost all

transactions involving consumption of goods and services are settled in cash (16)

Thus, the amount of currency

circulating in the hands of the non-bank public bears a

direct relationship to the size of funds available to the

Chinese consumers and even enterprises.

19.

According to the Chinese statistics, currency in

circulation continued to grow rapidly, by 13.5% (or 66% if

annualised), during the third quarter of 1988. The

velocity of cash circulation is probably also on the

increase because, in anticipation of further inflation,

some Chinese residents have brought forward some of their

purchases. The resultant increase in the velocity of

circulation, coupled with a growth in money stock which

outpaced the underlying increase in real output, will have

added to the inflationary pressure.

(15) According to one estimate, of the newly created loans

in the first half of 1988, 90% were to be used for working capital, which had to be expanded because of increases in the prices of raw materials and energy.

(16) In principle, inter-firm transactions should be

settled by bank transfers.

CONFIDENTIAL #