G.F. 326
CONFIDENTIAL #≈
16.
11
As regards combatting inflation, one possible
If the Chinese authorities were
method is to do nothing.
-
to allow the economy to take its natural course, the present inflationary gap in China's economy would close in due course. With prices increasing at rates approaching or even faster than the growth in money incomes, there would eventually be a slow down in the growth rate of, or
(13) which even a reduction in real purchasing power would lead to some slackening in aggregate demand. However, notwithstanding the effectiveness of this self-correcting process, the required adjustment on the part of the consumers and enterprises in China would almost certainly be painful.
17.
Although the Chinese authorities are unlikely to allow the economy to run its own course, they do not seem to have any effective macroeconomic (fiscal or monetary)
The fiscal means to contain the accelerating inflation. policy stance is still expansionary as far as its impact on the economy is concerned, with a budgetted fiscal deficit for 1988 amounting to Rmb 8 billion, or nearly Rmb 30 billion if the western accounting practice of excluding domestic and foreign borrowings from total revenue is followed. China has no effective means to cut spending. On the contrary, inflation has led to more In 1988, for spending on the part of the government. instance, price subsidies are budgetted at Rmb 35.8 billion or 14% of total expenditure. On the other hand,
(13) The rising prices will eat away the purchasing power of consumers' income and wealth, forcing them to cut back on consumption. Eventually, consumers' appetite for goods and services will be scaled down to the economy's capacity to provide those goods and services, and at this point, the self-correcting process stops.
CONFIDENTIAL #B
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