SECRET
4. We are thus on the verge of a potentially serious crisis in our relations with Hong Kong (with wider political and strategic implications) for the sake of approximately £15 million over 5 years. I think the Governor is right to warn that it would be very dangerous to approach Finance Committee on this matter. They would react very strongly
indeed, with repercussions on HMG generally in the
territory.
5.
Hong Kong will revert within two weeks with their decisions on various financing options which the MOD have put to them. If the response is negative, we can expect the MOD to act very quickly. The Defence Secretary is likely to write to the Foreign Secretary proposing withdrawal of the boats. We should try to prevent this.
6. This issue is the latest in a series of Hong Kong problems with financial implications for HMG. Those issues are likely to arise with increasing frequency as 1997 approaches. Mr Blatherwick has suggested that it might be worth the Secretary of State asking the Prime Minister to circulate a minute to all Ministers about Hong Kong warning that Hong Kong is going to be a difficult problem for the next six years and an expensive one at that; and that a special effort should be made for this, if only for this limited period, to ensure that all goes well.
ROZAXD/2
ARPac
A R Paul
SECRET