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concern that civil service pay and pensions will be a heavy burden after 1997 and suggested that to reassure local civil servants HKG might "set-aside" a fund of HK$15 bn, on top of the HK$25 bn laid down in the Airport Memorandum of Understanding, which could be drawn on to help meet pensions in years of budgetary difficulty. HKG have explained that it makes no sense to tie up funds in this way and that pensions must continue to be met from (expanding) general revenue. We have considered whether we could build on the idea of set-aside to persuade the Chinese to accept the capitalisation proposal for HMOCS officers. But whereas set-aside would commit HKG to providing the SAR Government in 1997 with an extra nest-egg (and thereby limiting HKG's ability to disburse Hong Kong funds before 1997 on projects of interest to British businessmen), capitalisation would enable HKG to transfer to HMG in the UK (or perhaps to some offshore fund) before 1997 a sum of money which would otherwise have been available to the SAR Government in 1997. The FCO therefore see no prospect of convincing the Chinese that it would be in their or the SAR Government's interest thus to discharge before 1997 their future liabilities for expatriate civil servants. Instead the proposal would fuel their suspicions of British/Hong Kong asset-stripping. At the least they would engage us in lengthy dialogue: at the worst they could accuse us of trying to renege on the Joint Declaration and could withdraw co-operation in other areas, despite the damage this would do to the prospects of a smooth transition in 1997 and to the authority of the Hong Kong Government. If we sought to take unilateral action, the Chinese could frustrate it by announcing that this was a major change in the arrangements existing in 1984, and that the SAR Government after 1997 would be free to over-turn it and/or to reconsider related provisions of the Joint
Declaration.
Comment: Departments differ on the political feasibility of this option.
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