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CONFIDENTIAL
34. The present change of front in the confrontation thus mainly derives, first, from the countering of every preceding move by the combined determination of Government and people and, secondly, from pressure from Peking to restore the economic damage caused in China. These are solid and continuing reasons militating against a recurrence of last summer's violent offensive against us, and give rise to cautious optimism for the immediate future.
35. The signs now apparent of some return towards less chaotic conditions in China can be cautiously welcomed. Some observers believe that the cultural revolution has probably failed and will soon be abandoned; but it is equally possible that Chairman Mao has made no more than a tactical retreat. There are, however, many indications that Chou En-lai and the "moderates" in Peking are for the moment gaining the upper hand; and it is to be hoped that this will bring about a return to more rational relations-although any predictions about the future actions of a country which gives every appearance of having gone through an attack of dementia are obviously rash. A stable China, moreover, will not necessarily prove any less dangerous than a China in chaos; one can only hope that it might.
36. The economy, after weathering the storms of riots and work stoppages, is still sufficiently robust to accept the adjustments required by devaluation and we can at least express a cautious optimism that economic confidence in the Colony will continue to be maintained.
37. Public morale is good except perhaps amongst the educated young, to whom 1997 is a real date and a time when they expect to be in the prime of life. The events of last year have undoubtedly aroused or re-aroused in many of them a most anxious and understandable questioning of what the future may hold for them here. On this they seek answers with increasing urgency from their elders and from the Government, but they find no satisfaction.
CONFIDENTIAL
I have, &c.
DAVID TRENCH.
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