TNAG-1873-FCO40-2661-Relations-between-Hong-Kong-and-China-1989 — Page 206

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an attempt to limit inflation, and price subsidies and wage indexation have been used to try to accommodate

inflation and reduce its adverse effects on individuals

and enterprises. However, none of these devices tackle the fundamental problem of demand being in excess of supply and, indeed, attempting to accommodate inflation risks fuelling a further twist in the wage price spiral (paragraphs 20 to 22).

8.

With China's production and distribution

system remaining intact though under severe strain and with the growth rate of its money supply not totally out

of control, the chance of hyper-inflation developing

does not seem very great. But a sustained period of

double-digit rate of inflation may have begun. Even an

inflation rate of between 10 and 20%, coupled with

widening gaps between incomes in different localities

and trades and the absence of a comprehensive social

security system, could lead to social unrest. In the

last resort, the authorities may be able to rely on coercion and bureaucratic controls on prices to prevent

unrest. However, such an authoritarian and conservative

policy stance would impair the pace of economic reform and could have serious implications for confidence

(paragraphs 37 and 38).

Implications of China's inflation problem for Hong Kong

9.

Inflation in China seems likely to affect Hong Kong in a number of ways. Some of these arise directly from the inflation itself and others, generally of a longer-term nature, from possible attempts by the Chinese authorities to control inflation.

G.F. 326

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