TNAG-1873-FCO40-2661-Relations-between-Hong-Kong-and-China-1989 — Page 204

CONFIDENTIAL #32

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further added to aggregate demand in the economy (paragraph 10). These rapid increases in income and investment would not have been possible had China's monetary policy not been accommodating (paragraph 11).

3.

Price reform measures which are aimed at

redressing structural imbalances in China's economy and rationalising China pricing system have also resulted in net increases in prices through shifts in relative prices. Apart from this, price reform has in most cases

involved the transformation of excess demand with

associated suppressed inflation into open inflation

(paragraphs 12 to 14).

4.

Although some of the planned price reforms

have been deferred as a result of the inflation, some of

the existing reforms are continuing with ongoing

inflationary consequences. More seriously little has

been done to reduce the extent of excess demand and

indeed some of the measure taken to accommodate past

inflation, such as price subsidies and cost of living

increases in incomes tend to add fuel to the

inflationary spiral. The prospect is that, unless there.

is a significant change in policy in the near future,

rapid inflation will continue for some time.

there are risks for Hong Kong.

Either way

Possible measures to combat or accomodate inflation

5.

If prices increase faster than money incomes, in due course the purchasing power of consumers will be reduced in real terms and the inflationary gap in China's economy would close through effective demand

falling until it matched supply. Thus, in due course inflation would cease automatically but at higher price

G.F. 326

CONFIDENTIAL #B