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continuation of existing policies. However, present
indications are that further progress on the reform programme is being delayed and a reversion to ad hoc controls and planning is being favoured. This may well be successful in damping down inflation but by
suppressing it rather than by tackling its root cause
(paragraph 20).
18.
A back-tracking on reform, if it could be
successfully presented as temporary, would probably not
be too damaging to confidence in that it could seen as further evidence of China's new pragmatic, rather than
dogmatic, approach to economic policy. But if the
present, somewhat muddled policy response to inflation continues and serious social unrest were to emerge requiring a more severe economic response and some repression, the damage to confidence, both in China and, by reflection, in Hong Kong, could be very damaging.
Conclusion
19.
China's economic reforms have entered a
critical stage and its economy is now at a cross-roads. Given that economic growth has brought obvious benefits, there is likely to be a reluctance to abandon the rapid growth policy. In the longer term, further increases in supply would hopefully meet the demand in the economy and hence eliminate the inflationary gap, especially if steps were taken to slow down the growth rate of that demand. However, with the current high and accelerating rate of inflation, there may not be time to let this happen. In these circumstances it is probably very tempting for the Chinese authorities to back-track on some of the price reform measures and/or to re-impose some previously lifted controls on prices so as to provide some immediate relief to the inflation problem (paragraph 48).
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