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indifference to HMG.
4.
The papers enclosed with my minute of 11 February make quite clear that, because of White Paper commitments, practice in other Dependent Territories and Ministerial statements, HMG have a clear duty to ensure that Hong Kong HMOCS officers enjoy sterling safeguards of their pensions. We should have liked HKG to fund these safeguards, eg by capitalisation before 1997 as suggested in paragraph 3 of your minute.
But I am clear that this would not be possible without provoking a constitutional and political crisis in Hong Kong and a diplomatic confrontation with the Chinese who, irrespective of financial logic, would deplore the transfer out of Hong Kong reserves of some HK$5 bn on the eve of 1997. The financial and political costs to HMG of such a situation and the associated collapse of confidence
immense. would be far more enerous than even the most expensive option for HMG funded sterling safeguards.
The situation
would be almost as grave if the failure of HMG and HKG to provide the assurances necessary led to the exodus of senior police officers and civil servants of which the Governor has warned, with its consequences for our ability to administer the territory and to wider confidence.
5.
I hope
There remains on the table one alternative option to HMG-funded sterling safeguards, which officials of all departments have agreed would be attractive if a feasible scheme can be worked out: Option (d) in the paper enclosed with my minute, a commercial hypothecation approach. that the experts will be able to make this work at an acceptable cost (I think all concerned recognise that some HMG funding would be needed). But if they fail, I believe that HMG will have to provide a safeguard scheme, including a contingent liability for HMG, as proposed by my officials last August.
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