TNAG-0639-FCO40-787-Construction-of-underground-railway-system-in-Hong-Kong-(Mas-1978 — Page 24

CONFIDENTIAL

15

75)

British Trade Commission in Hong Kong 9th Floor Gammon House 12 Harcourt Road Hong Kong

Mail Address: PO Box No 528 Hong Kong

Telex HX 73031

Cable Address Uktrade Hong Kong Telephone 5-230176

J.A.B. Stewart, Esq., OBE,

Hong Kong & General Department, F.C.O.

ECO 173/1

1977.

28 July

TW C

HKK 1641 HKK 173/1

Inforize. In unay / Action on Para(s)

un John,

HONG KONG AND E.C.G.D.

I enclose a copy of the record of a meeting which took place at ECGD on 17 June with Norman Thompson, Chairman of the Mass Transit Railway Corporation. You will note that the record is dated 18 July and has thus crossed with a request which I made in a letter of 26 July to Jim Ashwood in CRE4 for some background information on ECGD's attitudes towards the next phase of the Mass Transit project which was approved by the Hong Kong. Government on 19 July.

Norman

2. You will see from paragraph 9 that Norman Thompson questioned the need for a Hong Kong Government guarantee to the security of a loan made to the Mass Transit Railway Corporation. In his reply Bob Kemp said that he fully accepted that the Government would never allow the Corporation to default whether or not guarantees had been given "so far as the present Government of Hong Kong was concerned". Thompson questioned me about this when I made my initial call on him last week and I am in something of a dilemma as to what was the philosophy behind Bob Kemp's statement. I well recognise that ECGD's normal policy is to seek Government guarantees for loans for large, projects of this nature but I wonder whether it is strictly relevant in the special political circumstances of Hong Kong.

3. This is a question on which I should welcome advice from you and Christopher Roberts to whom I am sending a copy of this letter. I have noted also that in a letter of 12 July to Joan Kelley at the Treasury about the proposed Hong Kong power station project, George of the Bank of England in a discussion about the possibility of financing the project in Hong Kong dollars, said that such an arrangement would create a precedent for other contracts financed in appreciation-prone currencies and that the Bank. was

I concerned about ECGD's exposure in Hong Kong dollars in the event of a default. have, of course, no expertise in thes highly technical financial questions but it. does occur to me that argumentation of this kind could be twisted by those in Hong Kong who argue that Britain lacks faith in the future of the Colony and it currency. Since in our discussions with CLP/PEPCO we are trying to present a package as an act of faith by HMG in the future development of Hong Kong it seems to me important that you and Christopher should be fully aware of the possible danger to our general reputation in this market if we do not get flexibility in discussions with organisations such as CLP/PEPCO and MTRS on the financial backing of their projects.

4.

I should, therefore, be extremely grateful for any preliminary comments you may have on these observations and have not copied the letter elsewhere.

ück.

CD. M. March

C. W. Roberts, Esq.,