CODE 18 77
Mr Davies
SOFT LOAN FOR CHINA
CONFIDENTIAL HKK
Reference
04011
JESSPR NO. 51
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R&R tome
J18.3
1. I have spoken to Miss Baker (233.4658) in Export Finance Division, HM Treasury, about the latest approach by Sir Y-K Pao. She tells me that the Chancellor's Private Office are not proposing to record his breakfast conversation with Sir G Howe on 16 March. Having spoken to Mr Holmes (Private Office) before Pao saw the Secretary of State, they now consider the ball to be in the FCO Court. I have therefore agreed that Mr Elliott should write to Mr Hawlin, HM Treasury, copying to other interested departments, seeking considered views on the Pao proposal.I am drafting.
2. Meanwhile, what do the Chinese want? Gu Mu told Mr Rees in December that Sir John Buckley of Davy had said to the Chinese Ambassador that he could raise a loan of $10 bn at 9% within an hour. Gu said that if this was a buyer credit he was not interested, but if it was money to be raised on the open market then the terms were very attractive. He asked for clarification. DOT have since established that Sir J Buckley had been speaking of an ECGD package; they have explained this to our Embassy. The Chinese Embassy in London have probably reported the position to Peking.
3. Export credits on ECGD terms have been available to the Chinese on a very large scale since at least the end of 1978, but they have not shown much interest. The rise in ECGD (and OECD consensus) rates from 7.25% to 7.5% and now 9% has not seemed to perturb them much; not did it much encourage early conclusion of contracts at the old rates before each rise took place (although British businessmen have certainly drawn the implications to their attention). The effect of ATP is essentially to soften ECGD interest rates by a couple of points. A good ATP package would be presentationally useful and might help win some contracts; we must therefore continue to fight the cause with ODA and then DOT. But the best conceivable ATP package would still not be what Gu Mu has asked for: a vast loan ($1bn?) at aid interest rates (3%?) which could presumably be used, like Japanese loans, on Chinese local costs as well as British and other imports, probably for coal projects. ATP is inadequate from this point of view because:
a. the total credit would be much too small;
b.
the interest rates would be much too high; and C. the credit could be applied only to British goods
and services.
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What is required is a huge bilateral project aid programme (although our philosophy now for poor developing countries is, to give aid as grants rather than as soft loans); we have accepted that this is out of the question for at least the next couple of years.
CONFIDENTIAL
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