CONFIDENTIAL
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hat they were not propared to guarantoo any part of the loan. Thoy asked the Hong Kong Governmont to take the latter's 25% option ($27.5 million) and to persuado the Yaunati Forry Company to take up tho romaining $21.5 million. The Governor, however, in roporting this approach, said that he might profor to take up the whole $49 million and to offor the Forry Company no more than would loevo control in the hands of the Hong Kong Government and of the Hong Kong and Shanghai Bank.
10.
Recent events in Hong Kong have made the tunnol project less of a good commercial risk but have greatly increased its political importance. The local Communist clononts have sought by propaganda, intimidation and violence to undomino the confidence of the pooplo of Hong Kong in our ability to maintain our authority and administration thoro. They havo failod so far bocause the vast majority of Chinese have firmly and oponly supported their Government and the oxisting order. But the battle of sustaining public confidence requires that the outside world and Britain in particular should domonstrato support for Hong Kong and show confidoncc in their ability to withstand those pressures. Tho Hong Kong Government are concornod that indefinito postponement of the tunnel project would bo interpreted in Hong Kong as an indication of the outside world's lack of confidence in the Colony's future. It is not known whothor, if Costains had to withdraw, one of the other tendering firms would still wish to procood but even if the project wore to be saved damage to confidence occasioned by the with- holding of British financial support would romain and a major and probably prostigious engineering contract would almost certainly be lost to Britain.
11.
Costains' tondor expired on 28th Juno but they agrood to oxtond it until 31st August on cortain conditions one of which was that a furthor £35,000 should be paid by the Tunnel Company (the Hong Kong Government agrood to reimburso the Company 50% of this payment). Successive extensions have kopt the tonder opon until now. In spite of the troubles and of their retroat from their provious position on sharoholdings and on guaranroos, the Tunnel Company still insist that they wish the project to procood.
CONFIDENTIAL
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