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03 NOV 1987
SECRET
Mr Hum HKD
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Stuart Alexander Eland House
4/11
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Secretary of State's Breakfast with Y K Pao
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As you know, the Secretary of State had breakfast with Sir Y K Pao this morning.
markets.
Sir Y K Pao spoke at length of his concern about world
He regarded President Reagan's response hitherto as inadequate, and said that he would urge the Prime Minister, who was the only person likely to be able to exercise influence on the President, to encourage President Reagan to raise taxes.
Sir Y K also spoke about his serious concern about the Hong Kong futures market: he was very apprehensive as to what would happen when it reopened on Monday. Most of the banks concerned had limited liability and proposed to walk away from the problem. He had discussed the matter with Purves. The Hong Kong Shanghai Bank would not walk away, because they recognised the disastrous effect which a catastrophe could have on Hong Kong generally.
Sir Y K Pao's role on the BLDC was also discussed. He said that he had himself suggested the formation of the "Overall Working Group", and urged the necessity of its having a Hong Kong co-Chairman. He had been worried that all the various working groups were going in different directions with little coordination. He had not himself intended to be landed with the job of co-Chairman, but the other names canvassed had all been unacceptable for various reasons. He had warned the Chinese that he could give virtually no time to the job. The Secretary of State said that we regarded it as critical that the Basic Law should faithfully reflect the Joint Declaration. Sir Y K said that he entirely agreed: it was crucial that it should reflect it down to the last word.
More generally Sir Y K Pao said that he had been extremely active in impressing upon the people in Hong Kong the one country aspect of two systems. The fact was that after 1997 Britain would no longer be underpinning the Hong Kong economy, and China was the only guarantee. But he had also emphasised in China the importance of the two systems aspect.
He recalled that Gu Mu had some time ago raised the development of Shamien Island in Canton with himself, Li Kashing and other financiers. They had all told him that the only way to promote self-reliant development was to provide sufficient confidence to entrepreneurs. Gu Mu said that he would like to see a system similar to Hong Kong established. Sir Y K and the others had said that in that
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