CODE 18-77
HKK 121/1
CONFIDENTIAL
Reference.......
3
Mr Leeks HKD
HKK 1027 RECEIVED IN REGIST
22 JAN 1987
DESY OF PICU
PRC INVESTMENT IN HONG KONG.
REGISTRY
Action Takas
1. In your minute-of- 5 January you asked for comments on Mr Hardcastle's letter of 16 December 1986 to Mr Renton.
2. As I said when we discussed this on the telephone, the information from Mr Hardcastle's Chinese interlocutor, as set out in the letter, seems garbled. Mr Hallett has dealt with the main points in his minute to you of 8 January. I offer a few additional comments.
3. The third sentence of Mr Hardcastle's second paragraph reads: "Negotiation of the agreement led to considerable unhappiness in Hong Kong which in turn led to the flight of confidence and the collapse of the local markets". were taken to refer to the period of the negotiations it would be an exaggeration rather than a clearly false statement. I suppose it is possible that the Chinese interlocutor may have been speaking of events during the negotiations rather than after their completion and that Mr Hardcastle may have misinterpreted him. At any rate it is clear from the next few sentences in Mr Hardcastle's letter that he understood the Chinese as referring to events following the Agreement. Interpreted in this way, the statement is plainly wrong. In fact the Hang Seng index registered a modest increase in the first few weeks after the initialling of the Agreement in September 1984, and if I remember correctly it began to improve more strongly in early 1985. The property market, which had declined in 1982-83 performed less well following the Agreement, but also did not "collapse".
4. Nevertheless, I think it is true to say that both during the negotiations and since their conclusion, except at one or two particular moments during the negotiations when they wished to to register a point, the Chinese have in general conducted their trade and investment policy with regard to Hong Kong in a way helpful to confidence there. Among Chinese investments in Hong Kong during the negotiations one of US $5.5m by the Everbright Corporation headed by Wang Guangying in a property venture in early 1984 attracted publicity. Following the initialling of the Joint Declaration in September 1984 the Chinese continued to invest in Hong Kong and may have done so at a somewhat higher rate than previously. In an article in the Three Banks Review of March 1985, Dr Y C Jao of the University of Hong Kong commented that during Hong Kong's "currency crisis" of 1982-83 China lost about US $1.1 billion as a result of the depreciation of the Hong Kong dollar but refrained from passing on the loss to Hong Kong through raising the supply prices of Chinese goods. He added that the depreciation of the Chinese currency against the Hong
CONFIDENTIAL