CO537-3712 — Page 8

aggressor on the mainland it would probably not matter very much whether Hong Kong's water supplies were partly derived from sources in the New Territories òr on the Island itself.

What we have, I suggest, to consider is whether, if a friendly power not at war with us were to be in control of the New Territories at the end of the lease, the position of Hong Kong would become impossible. I suggest that, if the power were really friendly, and if it is agreed that the retention of Hong Kong without the New Territories would still be a practicable and worthwhile proposition, it should be possible to come to some arrangement under which access to these water supplies would be permitted.

If this conclusion is correct, then it seems to me that the only way in which to proceed, although it is obviously fraught with risk, is to assume:

(a) that we shall not agree to hand back the New Territories to China until the end of the lease; but

(b) that, if for any reason it was decided to do so, we should, as part of the deal with a friendly China, be able to make conditions which would ensure access to the water supplies and, possibly, even some contribution towards the capital cost;

(c) that, in the case of all development in the New Territories, we should be careful to plan it on the basis that the capital cost will be fully amortized upon the end of the lease; and

(a) that continued development in the New Territories is desirable as an indication to the Chinese that we intend to remain there until the end of the lease.

Short of proceeding on some such basis as the above, it seems to me that much really essential development may be brought to a standstill, and my own feeling is that, in view of the general precarious position of Hong Kong in the event of a war with a. major hostile power on the mainland, there is possibly not a great deal of advantage to be gained by locating new waterworks develop- ment, etc., at any very considerable increased cost on the Island of Hong Kong in preference to carrying out such development in the New Territories. I agree, however, that other factors such as cost, etc., being equal, if it is possible to improve the water supplies of Hong Kong by development of new catchment areas in the Island itself that should not be neglected. It does not appear, however, that that is the case.

The whole issue turns, I think, on the answer to the question whether it is a practical proposition to hold on to Hong Kong once the New Territories are again in Chinese hands. The answer to that depends on:-

(a) whether our relations with China are then on a sufficiently friendly basis for them to be willing that we should remain there for the mutual benefit of China and ourselves; or

(b) whether, even short of active aggression, they could make the continued existence of Hong Kong as a British territory impossible.

This is a very big question, and I doubt whether any certain answer can be given to it, but, if it is fundamental, as I suggest it is, to any decision in regard to our policy for the future use of the New Territories for development, it may be thought that we should seek the Governor's view on these points, more especially as it is also fundamental, as I see it, to the general question of development recommended in Sir P. Abercrombie's report.

I am inclined, however, not to let this delay a conclusion on the reservoir issue, but to proceed by an amended draft on the lines which Mr. Bourdillon has suggested (in so doing the phrase

"extreme