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that they were not propared to guarantoo any part of the loan. They asked the Hong Kong Governont to take the latter's 25% option ($27.5 million) and to persuado the Yaunati Forry Company to take up the remaining $21.5 million. The Governor, however, in roporting this approach, said that he night prefer to take up the whole $49 million and to offor the Ferry Company no more than would loavo control in the hands of the Hong Kong Government and of the Hong Kong and Shanghai Bank.
10. Rocont ovonts in Hong Kong havo made the tunnel project less of a good commercial risk but havo groatly increased its political inportance. Tho local Communist clomonts have sought by propaganda, intimidation and violonce to undermine the confidence of the people of Hong Kong in our ability to maintain our authority and administration there. They have failed so far bocause the vast majority of Chinese have firmly and oponly supported their Government and the existing order. But the battle of sustaining public confidence requires that the outside world and Britain in particular should demonstrate support for Hong Kong and show confidonco in their ability to withstand theso pressures. The Hong Kong Govormont are concerned that indofinito postponement of the tunnel project would be interpreted in Hong Kong as an indication of the outside world's lack of confidence in tho
Colony's futuro. It is not known whother, if Costains had to withdraw, one of the other tendering firms would still wish to procood but ovon if the project were to be savod danage to confidonce occasioned by the with- holding of British financial support would romain and a major and probably prostigious onginooring contract would almost certainly be lost to Britain.
Costains tonder 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 bo paid by the Tunnol Company (the Hong Kong Government agrood to roinburso the Company 50% of this payment). Successive extensions have kopt the tonder opon until now. In spite of the troubles and of their retreat from their previous position on sharoholdings and on guaranroos, the Tunnol Company still insist that they wish the project to procosd.
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CONFIDENTIAL
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