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to take 1982 as a potentially critical year. If confidence in the value of land leases in the New Territories began Lo fade, not only would investment dry up, but property developers would rapidly redeploy their cash flow overseas, with consequent damage to the value of the Hong Kong dollar.
5. The Chinese rejected our proposal on the grounds that it was neither necessary nor appropriate. No doubt an element in their conclusion that a solution was not necessary was that they saw no urgency (eg the way Huang Hua spoke to me in Peking). But the reason stated to you was that the problem had already been dealt with by Deng Xiaoping's statement to me, including assurances to investors which have subsequently been restated by Hua Guofeng. The Chinese may well believe that by repetition of such assurances they can maintain confidence in Hong Kong until they are ready to consider its political future.
6. While it is true the Chinese could prolong confidence in this way for an extra year or two, sooner or later they will fail to do so because: -
7.
a)
b)
longer leases in the New Territories must be assured if investment is not to dry up and a flight of capital start, and
they ignore the connection between confidence and the possibility of continued British administration.
Since the démarches of last year about the leases it has become clear that our proposed solution raised problems for the Chinese both in respect of a precedent for other treaty territories and Taiwan, and also raised domestic political difficulties. I do not think any of this should be underrated.
8.
A credible move on 5(a) would postpone the time at which a move on (b) was necessary. Moreover (b) raises greater political difficulties for the Chinese. I therefore think we would be prudent to leave paragraph ☛(b) on one side for several years, and that our next move should be on (a) only. I suggest we should take as our starting point Deng's statement to me and the assurances contained in it since this constitutes the basic statement of the Chinese Government's position on Hong Kong. We should feel our way and on no account risk another rebuff.
9.
I think the first step should be to thicken out Deng's assurance to investors by obtaining confirmation that it referred to investment in real estate on Hong Kong Island, Kowloon and the New Territories as well as to industrial property. As you know the First Director of NCNA here has already told me that this was Deng's intention, but his authority for this is uncertain.
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