TNAG-0067-FCO40-103-Governors--reports-1968 — Page 54

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*G.F. 323

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hënë, maintaining our existing parity in terms of gold and thereby imposing a substantial immediate loss on the official reserves, on the banks, and to all others with sterling assets and existing or future Hong Kong dollar liabilities.

31. Our final solution was to devalue to the extent of 5.7% only, thus revaluing against sterling by 10%. It was hoped that the effects on costs and on terms of trade of devaluation of this magnitude would not be too severe. But it was also necessary, both because of the non-availability in the sterling area system of any cover against sterling risks and in order to prevent any loss of confidence in the banking system, to provide banks with a substantial degree of compensation from official funds for their consequential losses. The total cost to official reserves, both directly and indirectly by reason of this compensation, is estimated at £30 million. These reserves now lost had been earmarked to help to meet the cost of the substantial programmes of social (and, to a lesser extent, economic) development which are in train; and their loss is likely to result in some curtailment, or at least substantial postponement, of some of these plans. Our partial devaluation, will, therefore, also affect the living standards of the people; although not so directly or immediately as would have a full devaluation. Quite apart from the actual effects, sterling devaluation has put a most powerful political propaganda weapon in the hands of the communists and the only undeniably true political propaganda weapon they have. It is one they are still brandishing vigorously,

months after the event.

Conclusion

32. On the home front it appears that, while the communist effort is far from over and it is certain that their aim remains to reduce the Hong Kong Government to a satisfactory degree of subservience, nevertheless the assault on us has probably moved to a non-violent phase, with the communists concentrating their efforts on increasing their local support by trying to find popular grievances to exploit. Obviously this new tactic could be very dangerous but the communists have lost much ground and it will take them time to regain even the degree of public support they had before May last year.

33. Hong Kong has weathered the test of this summer's events mainly because the public as a whole, from highest to lowest, openly declared by word and deed that the Hong Kong Government had its over-whelming confidence and support in preference to the communist minority who sought to force us to kowtow. These feelings were in turn reflected throughout the Public Service, whose members responded with outstanding loyalty and efficiency to the calls made upon them. Nowhere was this more apparent than in the response of the Police Force, who performed their duties with the highest efficiency and firmness coupled with admirable restraint. They became public heroes, and were in turn sustained by public confidence in them.

34. The present change of front in the confrontation thus mainly derives, first, from the countering of every preceding move by the combined determination of Government and people and, secondly, from pressure from Peking to restore the economic damage caused in China. These are solid and continuing reasons militating against a recurrence of last summer's violent offensive against us, and give rise to cautious optimism for the immediate future.

35. The signs now apparent of some return towards less chaotic conditions in China can be cautiously welcomed. Some observers believe that the cultural revolution has probably failed and will soon be abandoned; but it is equally possible that Chairman Mao has made no more than a tactical retreat. There are, however, many indications that Chou En Lai and the 'moderates' in Peking are for the moment gaining the upper hand; and it is to be hoped that this will bring about a return to more rational relations although any predictions about the future actions of a country which gives every appearance of having gone through an attack of dementia are obviously rash. A stable China, more- over, will not necessarily prove any less dangerous than a China in chaos; one can only hope that it might.

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