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(c) The Chinese have been holding the Blue Funnel ship
s.a. "Demodocus" in an anchorage outside Shanghai since
about 29 February allegedly because some of its officers
have been "stealing" military information.
8. It is against this background of uncertainty that we must assess how to deal with the approach that the Governor has now received which purports to come from Chou En-lai. We share the Governor's assessment that the intermediaries can probably be
relied upon and that the approach is therefore a genuine one. The combination of the mildness of the approach and the tough-
ness of recent Chinese actions against us would be not untypical
of the Chineso. There is clearly advantage in probing Chinese
intentions with regard to Hong Kong, and a positive response
to the approach would seen the most effective way open to us to do so at present. In view of recent Chinese conduct, the prospects
of reaching some accommodation with the Chinese over Hong Kong
admittedly do not seem bright; but this does not mean that it
is not worth trying. The immediate problem is whether, by agreeing to informal discussions on the basis of the Chinese "demands", we shall be starting on the slippery slope to a
Macao-type situation (1.0. a situation in which, while we hold nominal power in Hong Kong, our actions are in fact dictated by various local communist organisations). I think, however, that
if we proceed with the utmost caution we should be able to avoid
this. The conditions set out by the Governor in his proposed
reply in paragraph 5 of Hong Kong telegram No. 330 should provide
adequate safeguarda for the initial moves.
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