CONFIDENTIAL # 3
28
In
additional foreign exchange would be released. that somewhat extreme set of circumstances, China's net foreign exchange earnings would increase as a
result of the transition.
31.
In practice, however, it seems unlikely that the central requirements in terms of trade and belief in the continuance of trade would be met. In that case, China's net foreign exchange earnings from Hong Kong would fall. The extent of the fall would depend on the extent of the damage to Hong Kong's trade, which depends, in part, on the nature and effect of the change that occurs.
32.
If, as seems likely, assimilation damages or suppresses the entrepreneurial spirit within Hong Kong, the net inflow of non-Renminbi foreign exchange earnings into Hong Kong is likely to be severely curtailed. The depressed level of economic activity. in Hong Kong that this would cause would be reflected in severely reduced demand for goods from the rest of China, both for goods for consumption in Hong Kong and for goods to be used as raw materials in the manufacture of exports. A further reduction would occur if assimilation, at the same time, results in a loss of, or at least a diminution in, Hong Kong's trading rights-of-access under the GATT and related
arrangements.
MEIDENTIAL #5