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12. Any incident which could possibly be construed as support for the idea of "Two Chinas " has remained a constant potential irritant in relations between Hong Kong and the CPG. In fact, as Peking is certainly well aware, Hong Kong has continued to achieve great success in suppressing the most important and most dangerous nationalist activity here, which is the use of the colony as a base for sabotage activities against the mainland. Between April 1965 and May 1966 over 70 Kuomintang Intelligence Service agents were arrested; and several large illegal caches of explosives and offensive weapons, often stored in crowded areas at great risk to the safety of the public, have been seized by the police.
13. Few other of the traditional (if trivial) bones of contention between China and the colony have caused trouble. Indeed the Chinese have on several occasions taken positive action to co-operate with the Hong Kong Government at a working level.
14. In the economic field the Chinese have made great efforts to expand their trade with the colony, now their largest export market in the world. In 1965 their total exports to Hong Kong increased by 17 per cent over the 1964 level, and over the first eight months of 1966, despite a slight recession in exports during the first two quarters, there was a further 11 per cent increase as compared with the previous year. At the same time the CPG continues to invest in the colony, largely in retail trade. By mid-1966 there were for instance some 34 large department stores trading solely in mainland products.
15. In short, although the intensification of the war in Viet-Nam initially resulted in greater sensitivity on the part of the Chinese about United States activities in Hong Kong, there has been no sign at all recently of increased aggressiveness by local pro-Communists in other directions.
16. It is a question how far this policy will be affected by the most recent developments in the Chinese Cultural Revolution. The appearance in the middle of August of the Red Guards, and their initial rampage through China, were watched with fascination and apprehension in the colony. Chinese visiting the mainland from Hong Kong were reported to have had their hair forcibly cut and to have been made to discard their Western-style shoes and clothes. The Red Guards announced that Hong Kong would henceforth be named Ch'un Ti— "Expel Imperialism City ".
17. But by the beginning of October nothing had happened to suggest any change in Chinese policy towards Hong Kong. One or two minor incidents occurred on the frontier in the month following the emergence of the Red Guards; nevertheless, there was fairly clear evidence that the Chinese authorities were determined not to let the situation get out of hand. For the time being realism still seems to be the basis of Chinese policy towards Hong Kong.
18. In this somewhat delicate state of equilibrium any major constitutional changes in the colony are out of court; this is generally accepted by responsible opinion. There has, however, been a growing interest in the machinery of Government and a growing criticism of some of its aspects which, though ill-informed for the most part, indicates that further steps are desirable to promote better understanding between the Administration and the people: differences in culture and language will always be a barrier requiring unusual measures to overcome. It is probable that feelings of this kind, whether conscious or unconscious, were in the minds of some of those who took part in the riots: others were mere hoodlums. It is nevertheless easy to assert, and virtually impossible to rebut, that one of the principal causes of the outbreak was Government's indifference to, and neglect of, the wishes and aspirations of the people.
19. Against this background I have recently tried to stimulate public interest in the possibilities of improving the system of local government, which, as one outcome, may permit an increased measure of popular participation, and so ought, in theory at least, to increase and strengthen the links between Government and people. The political implications of a development of this nature are, of course, considerably less significant than corresponding changes in the structure of the Central Government. But, political considerations apart, the introduction of a more up-to-date and effective system of local government ought to offer substantial administrative and other advantages.
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