TNAG-1873-FCO40-2661-Relations-between-Hong-Kong-and-China-1989 — Page 228

G.F. 326

CONFIDENTIAL #≈

16

and naturally they will complain about being deprived of a fair share of the gains associated with economic growth in

China.

25.

Inflation has also affected many state enterprises and collectives as they suffer from rising costs of production due to increases in the wages of workers and in the prices of industrial raw materials and machinery. The problem has been aggravated because some government departments and units levy all sorts of illegal charges on enterprises using the cloak of price reform. Besides, enterprises have to obtain that part of their supply of raw materials which is not allocated by the

If State from the market where prices are much higher. these state enterprises and collectives are allowed to raise the prices of their output, i.e. pass the cost increases to the consumers, which is quite feasible in view of the consumption boom at present, inflation may in such cases have an favourable impact on enterprises' profit. But in many cases, at most only part of the cost increases can be passed on because of government worries that inflation at the retail level is getting out of

control.

26.

Thus, just as it has granted food and housing subsidies to consumers, the Chinese government has also granted loss subsidies and subsidies of certain types of raw materials to enterprises (paragraphs 17 and 21). These consumer and business subsidies have now become a serious drain on the government's fiscal resources.

27.

While the state treasury, state enterprises and collectives, and consumers are the parties most adversely affected by inflation, the major beneficiaries are private enterprises, self-employed individuals and those state enterprises which have been successful in getting a major

CONFIDENTIAL #