TNAG-1873-FCO40-2661-Relations-between-Hong-Kong-and-China-1989 — Page 235

CONFIDENTIAL #3

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Implications of China's inflation problem for Hong Kong

39.

Unless China's inflation problem develops into a crisis, its implications for Hong Kong may be less than some people fear. In terms of prices, this is largely due to the offset to domestic inflation in China provided by the depreciating Renminbi in the black market and the government sanctioned foreign exchange adjustment centres. Guangdong (the Pearl River Delta region in particular) is the province with the closest economic relations with Hong Kong. Here the black (and grey) market for foreign exchange transactions is most flourishing. The adjustment mechanism thus available outside the official conversion channel has so far been strong and efficient enough to offset a large part of the Renminbi price increases related to domestic inflation in China. Although it cannot be demonstrated statistically, the proportion of foreign exchange transactions that go through the official channels (at Rmb 3.72/US$ or Rmb 47.7/HK$100) in Guangdong is almost certainly one of the lowest among all provinces, municipalities and autonomous regions in China, if not the lowest.

40.

(a) Prices of Hong Kong's imports from China

A large proportion of Hong Kong's imports from China, particularly fresh foodstuffs, come from the Guangdong Province. The year-on-year rate of increase in retail prices in June was 21% for Guangdong, compared with

19% for the country as a whole, and the average year-on-year rate of increase for the first half of 1988 was about 20% for Guangdong, about seven percentage points higher than the national average.

G.F. 326

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