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The patch looks good, but needs a number of improvements.

1. I have problems building this code. When trying to build
pgen, I get an error message of

Parser/parsetok.c: In function `parsetok':
Parser/parsetok.c:175: `encoding_decl' undeclared

The problem here is that graminit.h hasn't been built yet,
but parsetok refers to the symbol.

2. For some reason, error printing for incorrect encodings
does not work - it appears that it prints the wrong line in
the traceback.

3. The escape processing in Unicode literals is incorrect.
For example, u"\<non-ascii character>" should denote only
the non-ascii character. However, your implementation
replaces the non-ASCII character with \u<hex>, resulting in
\\u<hex>, so the first backslash unescapes the second one.

4. I believe the escape processing in byte strings is also
incorrect for encodings that allow \ in the second byte.
Before processing escape characters, you convert back into
the source encoding. If this produces a backslash character,
escape processing will misinterpret that byte as an escape
character.