CONFIDENTIAL # 3
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manipulation by Chinese exporters and Hong Kong importers (paragraph 42). This latter form of "laundering" is common in trade between an underdeveloped economy with exchange controls and a developed economy which has no controls.
13.
The above factors can, however, provide Hong Kong with only partial protection from China's
inflation. Not all trade can take place at the
unofficial or black market exchange rates
(paragraph 35). The impact of Chinese inflation on Hong Kong's prices is therefore likely to increase unless, as seems likely, there is an official devaluation of the
Renminbi in the next few months. After the last
devaluation two years ago, import prices from China
remained stable in Hong Kong dollar terms for over a
year. One other positive factor is that the influence
of China's export prices on Hong Kong's domestic
cost/price structure is declining as China is a less
important source of Hong Kong's retained imports now than previously. Only 11% of Hong Kong's retained
imports now come from China (paragraph 43).
14.
(b) China's demand for Hong Kong products
Hong Kong's exports to China, which were growing rapidly in the first half of 1988, appear to
have benefitted from China's rapid economic growth as
China has to rely more on imports to meet its
unsatisfied demand. Inflation in China will also have
made Hong Kong goods relatively more competitive
(paragraphs 44 and 45).
G.F. 326
CONTIDENTIAL #3
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