SECRET
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question.
This is perhaps a point which ought now in any case to be borne in mind by E.C.G.D. Any such line would need careful handling, of course, since we have no wish to do further damage to overseas business confidence in the Colony's future. There is also the danger that any action in the trade or economic field which appears to be taking the initiative against China could be regarded by them as escalating into economic warfare which could tempt them to retaliate, despite the cost to them and the effect on their standing with the local population, by for example - cutting off food or water supplies to Hong Kong.
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5. Our reading of the situation at present and in particular the article on 3 June in the People's Daily is that in spite of the strong language used China still wishes to keep the dispute mainly on a local, i.e, Hong Kong basis, It could, therefore, be counter-productive at this stage to do anything which hit at China directly.
6*
However, if China were to take the initiative by taking economic measures against the Colony it would then be of the utmost importance from Hong Kong's point of view for H.M.G. to take retaliatory action in the same field by, for example, using the measures described in paragraph 3 above together with, for example, more stringent controls on export of strategic-type materials.
7. I would appreciate your views or comments and also those of Peking.
(Passed as requested, and advance copies passed
to D.S.A.0. for Commonwealth Secretary and Messrs. de la Mare, Bolland and Wilson).
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