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not to oppose them openly. This pressur is en effective weapon in their hands.
33. Hong Kong is in addition a useful trading outpost for China especially as regards commercial dealings with countries with whom it does not have diplomatic relations. Preliminary negotiations for grain deals with Australia and Canada have often taken place in Hong Kong. Western firms, too, can readily make contact with Chinese commercial organisations in the Colony.
Hong Kong as hostage for our good behaviour
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China could at any time bring pressure to bear on the Colony with a view to influencing our policies or actions elsewhere than in the Colony. This might be used in the promotion of China's interests and to the detriment of our
interests.
Significance of Hong Kong's Economic Value to China
35. Hong Kong in our hands is of considerable economic value to China but its contribution to China's economy is clearly not indispensable and as that economy develops the Colony's importance as an earner of foreign exchange could diminish. Conversely, in present circumstances, Hong Kong in their hands would be economically almost valueless, since its two major sources of income (exports to Western markets and tourism) would largely dry up. The Chinese might have to resettle in China up to some 2 million people whose livelihood would have disappeared.
36. Such evidence as we have indicates that there are
differences within the Chinese leadership between the extremist group inspired by Mao who are unreservedly in favour of pushing the Cultural Revolution to the limit and encouraging "making
revolution" inside China and outside it, and a second group
of a more moderate and realist attitude including the Prime
Minister, Chou En-lai. It is possible that the first group might be disposed to sacrifice the economic benefits derived
from Hong Kong in the interests of intensifying the confrontation with the Hong Kong Government. The present indications that the Cultural Revolution is being wound up and the clear evidence of abandonment of a policy of violence in
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