CODE 18-77
CONFIDENTIAL
Reference..........................................................................
2
Mr Leeket
HKD
PRC INVESTMENT IN HONG KONG
CC: Mr Walker, FE Section, RD
Mr Fletcher-Cooke, FED
HKK 100/1
RECEIVED IN REGIST
22 JAN 1987
DEMY OFFICER INDEX
REGISTRY
1. Your minute of 5 January sought Comments on Mr Hardcastle's letter to Mr Renton, reporting arconversation in Beijing.
2. As you suggest, a rather bizarre story is being told about the causes of Chinese economic difficulties during 1985 which seems to have no basis in fact. It is argued:
3.
(a) negotiation of the Agreement led to lack of confidence and
"the collapse of local markets";
(b) China was obliged to support the economy through provision
of hard currency within the Territory;
(c) this hard currency drain caused a "fierce" slow-down in the
mainland economy: loss of control over imports was not the principal problem.
To take developments in the PRC during 1985 first, over-rapid growth in domestic demand, particularly for investment, coupled with decentralisation of control over imports, led to over-heating and an unsustainable external deficit. The build-up in external debt and decline in official reserves is explained by the visible trade deficit. Steps taken to restrain demand, which were starting to take effect by the end of 1985, were entirely necessary and sensible and have not in fact led to a "fierce" slow-down. Real GDP growth of about 12% in 1985 is expected to slow to about 7-8% during 1986 - hardly stagnation!
reads
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4.
The effect of the import boom on Hong Kong was as you note to leave China in the unusual position of spending more in the Territory than was earned there. (Gross earnings were smaller than total expenditure on imports not net expenditure as your minute
it is net foreign exchange earnings which became negative.)
5, I have seen no evidence that there has been any drastic increase in Chinese investment in Hong Kong since the Agreement this has not been identified in the reports of the HKG's China. Relations Committee. Even if this had occurred, this would not be "wasted" foreign exchange, since assets would have been acquired, yielding an income flow to the Chinese owners.
6.
Developments in the Hong Kong economy since the Agreement are principally to be explained by exchange rate movements and growth in its major export markets, and not by "support" by the Chinese
CONFIDENTIAL