TNAG-1873-FCO40-2661-Relations-between-Hong-Kong-and-China-1989 — Page 64

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periods of longer than three years because of the uncertainties involved. Notwithstanding these moves,

there were considerable doubts about whether tight

monetary conditions would be sustained for long because first, the Chinese leaders did not wish to see a sharp downturn in economic activity (paragraph 10) and second, there was strong political resistance from both local authorities and enterprises. Furthermore, in view of the

sluggish agricultural production, the Chinese authorities

have recently approved an increase in agricultural loans. Unless effective controls were imposed, there was a

likelihood that some of these 'agricultural loans' would

end up in rural industrial enterprises.

(ii) Stock and futures trading

18.

There has recently been much discussion about stock holding and trading. In Shanghai alone, over 1,000 enterprises were reported to have issued shares by the end

of September 1988. But the present indications are that the system of stock ownership and trading is still at a primitive stage. First, many of the so called 'stocks'

are more like 'bonds', offering a fixed dividend rather than conferring ownership rights and a share of the profits to stockholders. Second, trading is very thin with most of the stocks being held by investors as high yield assets. Third, a sound legal framework for the operation of the stock exchange has yet to be established and supporting facilities, for example, the

telecommunications system, are backward. Fourth, unless and until irrationalities in China's price system are removed, valuation of enterprise assets will inevitably be distorted and funds will not be channelled to their most efficient uses.

19.

In respect of futures trading, there were reports that the first futures market for agricultural

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