TNAG-2749-FCO40-3964-Economic-situation-in-Hong-Kong-1993 — Page 103

Dr Bristow-Smith

FED

_HUB 090/

LZ AUG 1993

Reference.

PA FIK Economy)

From: Mr Lane

Date: 11 August 1993

CC: Mr Clark, RAD

Mr Whitney, HKD Mr Hoy, ODA Mrs Fulwood, Caboff Mrs Currie, DTI Mr Orchard, Bank E Mr Lillie, PEKING Ms Lee, HONG KONG

35

CHINA'S ECONOMIC ADJUSTMENT: SOME COMMENTS

1.

You will have seen Peking telno 1097 detailing Chinese attempts to slow down the economy and bring order to the overheated markets. This minute adds some further comments, largely on the likely outcome.

Progress so far

2.

RECONC

Although the Chinese authorities have been slow to respond to rising inflation, the measures announced are difficult to fault technically (annex 1, Chronology of recent measures). This was also the view taken by the World Bank in a Country Strategy Report. Shock therapy has been shunned and there has been no re-imposition of price or import controls. Since July the Government has been busy signalling its intentions, partly with market economy tools like interest rate rises but also with a heavy dose of threats and warnings.

3.

Where there has been Government intervention it has generally been to promote orderly goods and money markets; much more of a market economy than central planning approach. The best example is in the foreign exchange markets where previous direct intervention (the dollar peg) was abandoned in favour of selective injection of foreign currency to correct a speculative bubble which had undervalued the yuan. Action to curb speculative investment, stock issuance and development zones have been designed to improve the functioning of these markets by enforcing existing regulations which had previously been flouted.

4. The requirement to call in unauthorised loans is admittedly more interventionist, but the intention is surely to get banks to behave like commercial banks rather to fund "political" projects of dubious returns. Changes in bank personnel announced in the press seem to point towards a desire to professionalise the antiquated financial system.

CODE 18-77