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was at its height, the rail service between Canton and the border was constantly interrupted, with a serious effect on the Colony's food supplies. A reduced quantity of pigs and vegetables continued to arrive at irregular intervals by road and by sea, but there was a general scarcity and prices rose significantly.
24. The situation did not improve until September, when conditions in China generally started to turn for the better. In Canton the rival combatants were ordered to stop their internecine war to allow the Canton Fair to open_on 15 October; the opening nevertheless had to be postponed until 15 November. When the fair was over, and national prestige no longer at stake, there was some renewal of disorders, which still continue in this area.
25. During this period no attempt was made to put pressure on the Colony by withholding supplies of food. In spite of the difficulties, such supplies as could be made available continued to arrive; and as soon as comparative order was restored in Kwangtung the volume of imports quickly returned to near normal.
26. In supplying water the Kwangtung authorities have been more equivocal. The rainfall in late 1966 and the early summer rains of 1967 were the lowest on record, and by the end of June, although we had drawn our full quota of Chinese water and an agreed addition of 1,800 million gallons, our reservoirs were dangerously low. In May we had asked for a further 2,000 million gallons for the month of July, but although so far as we were aware it could well be spared, we had no reply. Subsequent requests in June and July were also unanswered and the general ration had to be reduced to four hours every fourth day. Fortunately it rained in time to retrieve the situation, and we were able to revert to a four-hour daily supply for the rest of the summer.
27. Somewhat to our relief the supply from China was reintroduced on its due date of 1 October, but broad hints were dropped that we were expected to revert to a 24-hour supply. This we have done; but as a prudent precaution we have added to the supply saline water from Plover Cove, our newest and largest, reservoir constructed from an arm of the sea, in which the water enclosed still has a high salinity. The resulting mixture is salty to the taste (though well below the maximum acceptable to the World Health Organisation) and the local Communists have worked up a campaign to stop this "contamination ", claiming that it is injurious to health. Their motives are clearly to force us to use up our own resources so that we became dependent on further supplies from China-on their terms; and, as a further move in this direction they have, without offering any explanation, reduced the maximum daily draw-off from 62.5 to 55 million gallons. They have also so far refused to accept payment for the water drawn in November, December and January because we have refused to risk sending a foreman into. Chinese territory over the Man Kam To Bridge (as we used to do, but are under no obligation to do) to reconcile accounts. There remains the possibility that they may cut off supplies completely. In that event and given normal rainfall next summer we can hope to get by, with rationing, until the salinity in Plover Cove is sufficiently reduced by the inflow of fresh water to allow it to be used without dilution.
28. In the economic field, the Colony's productive performance has remained substantially unimpaired. Exports of domestically produced goods in 1967 were up by 16.9 per cent on 1966. This is the highest annual increase this decade. Order books for 1968 deliveries are also reported to be in a satisfactory state, but on the other hand, profit margins generally may, have been materially reduced. Imports only exceeded the 1966 level by 3.5 per cent for three reasons: namely, the interruption of food supplies from China during the summer months; the running down of manufacturers' and traders' inventories; and the continuing depression in the building and construction industries. Recently, however, the China trade has shown signs of recovery. This has had a beneficial effect on food prices which are now almost back to their pre-May levels. Probably the most significant development recently, however, was the beginning of a restoration of confidence: after falling in May, June, July and August, bank deposits have increased and the currency in circulation has declined now for four successive months. The net amount of money estimated to have been transferred out of the Colony over the year had declined to $165 million by the end of October, compared
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