CONFIDENTIAL
where it would run to.
There was no macro-economic
control. Chinese authorities did not know how to
control the money supply. Credit limits would be set and would be passed down to provinces but provinces would extend the credit and apply for more credit retrospectively. In this way, 20-30% more credit had been granted than originally expected. The Chinese officials had also been taken aback by the high consumer demand which had led to prices of good quality goods spiralling upwards. With interest rates at less than half of the inflation rate, people wanted to spend their money and in some cases this had led to panic buying and bank loans. Ag PA thought that another factor contributing to the problem were that there had been devaluation rumours. People did not understand what
devaluation meant. They thought it meant
redonomination. Govt Econ said that in certain circumstances devaluation could lead to prices going up quite quickly. Psychologically the Chinese leaders appeared to be afraid of inflation. The last time it had happened under the KMT the currency had become
worthless.
16.
Ag S for S asked what was the currency issued against. Govt Econ said that it was issued against nothing or
rather it was issued by the printing press. He feared that faced with the problems of inflation and price
reforms the Chinese would stall if not regress on
economic reform. The concept of slowing down for a while and then moving forward later on was difficult for them. They were using the Command economy approach to tackle the problem; price teams, income subsidies and
the subsidising of exports. If China was seen to go backwards on reform and people perceived HK's interests as being inextricably linked with those of China, this could have worrying implications for HK's economy. People might think that HK was no longer the place to
invest in.
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