TNAG-0067-FCO40-103-Governors--reports-1968 — Page 70

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militarily in Hong Kong or provoke an unauthorised intervention by extremists in Canton. We have, therefore, to proceed very carefully in our action against the Press, unions and particularly against the CPG-owned concerns which provide the direction and backing for the local Communists. On the Communist side, they must at all costs gain more support amongst the general public. They cannot do this by causing disturbances which upset the life of the colony; on the other hand, they cannot allow the issue to drop even temporarily. Their situation has been worsened rather than improved by the ambiguous terms of the editorial in the People's Daily in Peking on 3 June. This, though arrogant and offensive, appeared to lay emphasis on the need to plan for a long-drawn- out struggle with the definite implication that the local hierarchy cannot expect active support from China other than by way of propaganda. The danger is that the more militant rank and file may take this editorial, which was given wide publicity here, at its face value and see in it an encouragement to further action, thus making it more difficult for the more moderate of Communist leaders to exercise restraint.

17. A second major factor is the situation in China. Accounts of disorder approaching anarchy continue to come in. It may become increasingly difficult for Peking to exercise firm control over local Communist hotheads, both here and in Kwangtung. There is always the possibility that extremists in Canton might try to come to the aid of their fellow countrymen here, in defiance of Peking. However, the Chinese Army is the authoritative body in Kwangtung and it exercises firm control over the border area. This would seem to lessen the likelihood of such action.

18. It is too early as yet to assess with any accuracy what effect the present confrontation with the Communists will have on the economy. If, as appears likely, it continues for some time, the consequences could be serious. The damage done to Hong Kong's reputation as a safe investment centre for foreign and local business alike will continue until some sort of accommodation (tacit or otherwise) with the Communists is reached which can be seen to have some degree of permanency.

19. There has been no noticeable effect as yet on exports and, provided that the present Communist-inspired stoppages are not switched from utility services to the industrial sector, there is no reason why there should be any significant loss of exports. In this main sector at least the economy should remain strong. The tourist trade, however, is likely to be affected to some degree depending on whether any more disturbances occur.

20. It is noticeable that the Communists have not so far made any sustained attempt to disrupt the colony's food supplies from China. Nevertheless, the present situation has led to some price rises in basic commodities, particularly in rice (of which less than 30 per cent comes from China) as a result of rumours and hoarding. A request for additional water-in July-made in accordance with our water agreements, has not been answered and it remains to be seen whether it will be met.

21. Stock Exchange prices have been depressed by up to 20 per cent and the price of gold has soared from $262 per tael to about $290 depending on the day to day situation. Government expenditure has increased though not too significantly at present; a more serious effect may be a fall in Government revenue later should there be, as could happen, a slump in the economy generally, and in particular the loss of foreign investment capital.

Conclusion

22. The crisis is by no means over. We have weathered the initial storm pretty well; and, at the time of writing, appear to have forced the Communists to think again. This, however, the local hard core are doing with a malevolence probably enhanced by their initial failures. The keys to the future lie in maintaining Hong Kong's confidence in itself; in maintaining the confidence of the world outside in us for if our economy fails, all fails with it-and in our ability to continue to do business; and, finally, in the attitudes towards us of a China in convulsions.

I have, &c.

D. TRENCH (Governor).

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