CONFIDENTIAL #3
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in the market prices of the output above contract has to be much larger than would otherwise have been the case. With excess demand market prices will tend to rise
sharply
14.
(11).
Thus, price reform is by no means the only, or even the most important, cause of inflation. Apart from being one important factor causing shifts in relative prices, in most cases price reform has only involved the transformation of excess demands, with their associated suppressed inflation, into open inflation.
Possible measures to combat or accommodate inflation
15.
The problem of inflation has been intensively debated among the Chinese officials and economists recently. It is clear that inflation has become an important concern among the Chinese public and may inhibit the pace of further economic reform, particularly price reform. There appears, however, to be a significant divergence of views among the top Chinese
(11) A similar if less extreme example in Hong Kong is
property prices and rentals. Public housing amounts to about half of the total housing stock in Hong Kong. The supply, prices and rentals of public housing are not sensitive to changes in demand conditions for housing. So the magnitude of adjustment required to accommodate the changes in demand conditions has to be fully reflected in the market prices and rentals of private housing. Thus the prices and rentals of private residential property have to be subject to a greater degree of fluctuation than otherwise would have been, though the overall price and rental level averaging between . public and private housing may not have become higher.
G.F. 326
CONFIDENTIAL ##
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