TNAG-1873-FCO40-2661-Relations-between-Hong-Kong-and-China-1989 — Page 216

G.F. 326

CONFIDENTIAL # 3

(3)

incomes

•

This

This, therefore implies that of the other 80%, a very sizeable proportion must have enjoyed a remarkable improvement in their living standards. group of people is likely to be important in maintaining social stability and providing the necessary support to

Even in the first half the government's reform program.

of 1988 when inflation appeared to be getting out of control, wages and incomes were on average still

increasing at rates faster than prices

Underlying causes of inflation in China

6.

(4)

China's inflation problem should not be attributed solely to its price reform programme as there is no neat and tidy relationship between the two. As in a number of other economies, inflation in China has been mainly caused by two inter-related phenomena. First, aggregate demand in the economy is in excess of aggregate supply, i.e. in excess of the effective productive capacity. The resulting inflationary gap has to be eliminated by rising prices. Secondly, some inflationary pressures can be traced to the strains arising from, and the shifts in relative prices necessitated by, the rapid growth rate of China's economy. It is in this context that price reform has contributed to inflationary pressure.

(3) Most of them are probably people with relatively

stable income like government officials, academics and pensioners. Notwithstanding that they make up only 20% of the population, their influence may be proportionally greater than their sheer number suggests.

(4)

Comparing the first half of 1988 with the first half of 1987, employees in cities saw a 23.7% increase in their incomes and per capita cash income in rural areas went up by 25%, as against a rate of inflation of 13%.

CONFIDENTIAL #