1
CONFIDENTIAL
2.
The FCO said that Hong Kong could provide a guarantee of limited validity but that as it was constitutionally subordinate to the UK, we could veto the guarantee. However, such extreme action would carry unacceptable political risks. If the Hong Kong Government gave a guarantee, this did not commit HMG in any way. In discussion, it was agreed that it would be unwise to veto a guarantee; however, it would be prudent to disclaim ultimate responsibility at a suitable stage. The FCO and the Bank said that this would need careful handling in order to minimize embarrassments particularly over the sterling agreements,
where
we were nearing a settlement it was important, and because of the possibility of adverse political reaction from China.
3.
On tactics, the DTI said that the Hong Kong Government's replies to the Japanese and other contenders for the mass transit system contract could be exploited. For example, the Japanese bid was in Yen and now exceeded the ceiling price of $5000m; moreover, the bid had been declared valid even though it did not meet all the conditions laid down by the Hong Kong Government. In other words, the Hong Kong Government had already demonstrated that it was willing to modify its conditions. We might also point out to the Japanese that HMG would not be ultimately liable for any guarantee issued by the Hong Kong Government, and that they might find this and other political repercussions embarrassing. They would consider how to report to their Ministers, and would consult the FCO about
timing of the various actions that might be taken.
4. Summing up, the Chairman said that the UK should not veto a
guarantee by the Hong Kong Government, but should disclaim any liability thereon. We should also encourage UK exporters to sub- mit counter proposals, making as much use as possible of the leverage to which Departments had referred. She pointed out, however, that credit terms for UK participation in another consor-
tium would need fresh consideration.
HM Treasury
October 1973