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domestic credit expansion and where possible acting directly to restrict the growth of money supply. Clearly a substantial budgetary surplus will be appropriate. But while public expenditure can be allowed to continue to grow, its rate of growth will need to be trimmed back. The rates of 18% and 23% achieved in real terms in '77 and '78 would certainly be highly inflationary in 1979.
China
13.
The sympathetic atmosphere in China has made a great impression here. Euphoria about China certainly contributed to the unexpected persistence of domestic demand, particularly for land and domestic and commercial accommodation. The normalisation of Sino-American relations was also greatly welcomed here. Never has confidence in Hong Kong been so high, or Sino/British relations over and in Hong Kong been so good. The Chinese (unofficial) representative has been replaced by an official of higher rank, and his relations with my staff and myself are relaxed and workmanlike.
14. The New Government in Peking sees Hong Kong as having a part to play in its modernisation programme, not only as a source of foreign exchange, but also as a source of investment, managerial expertise and business know-how, and as a field for Chinese investment. Li Chiang, Minister of Foreign Trade, visited Hong Kong in December apparently to thump home this message to as wide an audience as possible.
15. Improved communications with Hong Kong to encourage tourism in China appear to be part of the scenario, ferry and plane services have been reopened to Canton for the first time since 1949, and negotiations have started for a Canton/Kowloon express train service.
16. These developments are greatly welcomed here, and there is an evident disposition to seize any commercial opportunities offered by the modernisation programme. But the speed of change inside China of both policies and personnel worries many people who remember how the pendulum has swung in the past. While I doubt if a reaction would much affect policy towards Hong Kong, the present leadership and its policies are so suited to HMG's interests, including interests in Hong Kong, and indeed to China's own interests, that one can only hope
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