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CONFIDENTIAL #3
printing new bank notes. Another contributory factor was that the specialised banks have boosted their lending in recent years so as to establish a higher base for
computing their lending quotas in future.
12.
(b) Shifts in relative prices
While excess demand at the aggregate level has exerted great pressure on the economy's supply capacity and hence led to inflation in the conventional sense, price reform measures which are aimed at redressing structural imbalances in China's economy and rationalising China's pricing system have also resulted in price increases through shifts in relative prices. Shifts in relative prices as well as a faster increase in prices are probably an inevitable feature of China's price reform given the degree of irrationality in the existing price system (10)
13.
Further, inflation in China's market sector is at least partly related to the 'contract responsibility system' under which only a fraction of the output of many products is disposed of in the free market. Because the prices for the contracted share of output are insensitive to changes in demand, the magnitude of adjustment required
(10) In the course of redressing structural imbalance in
China's economy and rationalising China's pricing system, goods and services with prices unreasonably high have to be reduced and others with prices unreasonably low have to be raised. most goods and services are rigid downward (price
But as prices of reductions are not easily accepted by sellers and are anyway not normally expected by buyers), most of the burden of adjustment has to be borne by raising the prices that are considered unreasonably low and the magnitudes of increase have also to be greater in order to rationalise the price relativities.
CONFIDENTIAL **
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