CO537-3712 — Page 7

NOTE

2.

Mr. Wallace's very useful note at No. ⇓ indicates clearly I think, that, up to the present, serious consideration has only been given to the possible line of policy we should adopt in the case of a premature handing back of the New Territories to China; and, in considering that issue, a conclusion was reached that it would be necessary to endeavour to get the Chinese to agree to certain conditions which would include joint control of water supplies situated in the New Territories. Whether such an arrange- ment would, in fact, work satisfactorily in practice is, perhaps, open to doubt.

The larger issue as to what should be done in such matters when the New Territories are handed back at the end of the lease has not, up to the present, been seriously considered, so far as Mr. Wallace's researches go, and I find no clear conclusion whether it would, in fact, be practicable satisfactorily to retain our hold on Hong Kong without the New Territories.

To reach any definite conclusion on this latter point appears to me, at this time, to be quite impracticable. It would primarily depend on the state of H.M.G.'s then relations with the Chinese Government, and on how far China had by then become a wholly Communist dominated country. These are matters on which

it is only possible to make a guess.

1

But it is not only the location of waterworks which is involved here; it is also the whole of the future planning of Hong Kong as foreshadowed in bir P. Abercrombie's report, as to the basis of which, i.e. the retention of the New Territories until the end of the lease, Mr. Wallace has referred. That report will only just have reached the Hong Kong Government, and its consideration will obviously take some considerable time.

How far it will be possible for the National Government in China to hold Communist aggression in China in the event of General Chiang-kai shek having to relinquish Northern China to Communist control (as it seems very possible that he will have to do), and of his having to endeavour to consolidate a non-Communist regime in the South, I cannot pretend to predict. What Hong Kong's role in the event of a determined effort by Chinese Communists, backed by Russia, to sweep the Europeans out of South East Asia would be, and the general precariousness of Hong Kong's situation in such an event, has been brought out in the survey of Far East strategic requirements which I sent to you to see recently on 94001/17/48.

There are so many imponderable considerations, and indeed the whole future position of Hong Kong vis-à-vis China is so obscure, that I feel in trying to frame our policy in such matters as the location of waterworks and the general development of Hong Kong we have no option but to take considerable risks. But, if that conclusion is correct, we must clearly take those risks with our eyes wide open. There is nothing in the Treaty of 1898 (copy attached) to require the Chinese Government to recoup H.M.G. for any development of the New Territories carried out by H.M.G. during the term of the lease. The Chinese Government can accordingly claim, I think, the return of the New Territories to them at the end of the lease; they can also refuse to consider any such claims, and we should certainly have no legal ground for pressing them to do so. It follows, therefore, that, unless previously amortized, any capital expenditure in the New Territories is likely to become a loss to the Hong Kong Government.

Now, strategically, Hong Kong is going to be valuable to

5.

H.M.G. as an advanced base for ships and aircraft in an attempt to delay, if possible, a Chinese Communist sweep, supported by Russia, to clear the Europeans out of South East Asia and the Malay Peninsula, but it is admitted that, in the event of H.M.G. being engaged in war with a major power on the mainland as aggressor, it would not be possible to hold Hong Kong. If, therefore, we had a hostile

/aggressor