CONFIDENTIAL
a contract award on the Lantau Fixed Crossing will be made in the Spring of 1992: timing on Shajiao C is uncertain but decisions could be taken by the end of 1991. It remains to be seen whether the UK bidders will win either or both of these projects, but it is likely that a commitment of ECGD cover on at least one of them could be deferred until 1992-93.
Several references are made in Nicholas Holgate's letter to Hong Kong and China effectively being one sovereign risk after 1997. Ministers have already considered this issue anas recently as March this year agreed that they should continue to be regarded as separate risks for the present. Since then, as FCO officials have confirmed, there have been no developments which change this position. In addition, there have been important developments reinforcing confidence in Hong Kong. Such information as ECGD officials have on the attitude of commercial banks is that they price post-1997 risk higher than pre-1997 Hong Kong risk but at a lower level than China risk which does not suggest that post-1997 Hong Kong risk is regarded as Chinese risk.
A further important point is that 88% of ECGD's existing exposure on Hong Kong falls due before the end of 1997 and 43% of China's exposure falls due in the same period. Both markets represent relatively good risks and Treasury officials were unable to substantiate or gain any support for the new implication in paragraph 8 of Nicholas Holgate's letter that the risks may have been understated. ECGD's risk assessment is based on 10 year balance of payment forecasts agreed by the Economic Sub Group chaired by the Bank of England, and allowance has been made for political uncertainty. concentration of risk in both of these markets but concentration is a fact of life in export credit (90% of ECGD's exposure is in 37 markets) and to try and avoid concentration completely would be akin to withdrawing export credit support for major project business.
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My Secretary of State agrees that it is desirable not to have too many eggs in the one basket, and he accepts that the concentration of ECGD exposure in China and Hong Kong is significant. However, when balancing the financial risks against the National Interest arguments for project support to these two countries we should not confuse the level of exposure with the degree of risk. Thus the potential for claims and losses which is significant must be considered against the low probability of these arising as calculated using agreed PMS methodology. When this is balanced against the strength of the National Interest arguments my Secretary of State believes that the risks are acceptable. This view is shared by ECGD's Accounting Officer. Both these cases can, as
CONFIDENTIAL
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the department for Enterprise
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