CONFIDENTIAL
6.
Further confirmation of the Chinese approach came at the
24-26 March meeting of the Joint Liaison Group, where the
senior Chinese representative made a strong attack on Hong
Kong's privatisation plans: he urged that Hong Kong should
cake no steps before 1997 to privatise the Kowloon and Canton Railway Corporation (KCRC), or otherwise unilaterally to dispose of the assets of the Hong Kong Government which
aust be transferred to China (and the SAR) on 1 July 1997.
The Chinese are wholly indifferent to the economic benefits
of such privatisation, which they explicitly stigmatized as selling of the family silver. When they take this attitude
to such a straight-forward proposal, which would involve no transfer of funds outside Hong Kong, what prospect is there of their taking a dispassionate view of the transfer to HMG
of the capital value of HMOCS pensions?
9.
I conclude that there is now no prospect of Hong Kong
providing the sterling safeguard or an adequate substitute
for it. This is not a question of any lack of will on the
part of the Governor or his government. Even if we
collectively judged it right to provoke the crisis with China that capitalisation would entail, it would not simply
be a question of instructing the Governor. to make the necessary arrangements: it would, require. an Order-in-Council over-riding the Hong Kong legislature's powers over finance.
This would cause a grave constitutional. crisis and set a
deplorable precedent for Hong Kong's financial autonomy
after 1997 as laid down. in the Joint Declaration.. It would
also go against. the whole pattern of our constitutional.
history and our relations with overseas, territories.
10.
There is no dispute that, because of the general assurances originally given by Robert Carr and Reginald Prentice, we already have a large contingent liablility in
respect of Hong Kong HMOCS pensions. I strongly believe
that we should now openly accept the limited contingent
liability of our sterling safeguard proposal. This would be
good for the morale of key Hong Kong-officials, and. police:
ARRAFT/4-
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CONFIDE
CLA ARAL