TNAG-0754-FCO40-958-Threat-to-Hong-Kong-1978 — Page 23

CS

CONFIDENTIAL

COULD CHINA RUN HONG KONG?

1.

The nature of Hong Kong's economy would make it difficult for the communists

to run and face them with considerabl political embarrassment if they failed.

Hong Kong is a complex economic structure where about 1/3rd of the 1.6 million

working population is involved in service industries and commerce, where

2/3rds of the manufacturing establishments employ under 10 people and only

some 40 plants employ over 1,000 employees. The economy is one of the best

examples in the world of a free enterprise society controlled by market forces.

To keep political face the communists would need to substitute for free enterprise,

political and economic mechanisms that would provide new forms of social cohesion

and adequate rewards for the full range of skills in the labour force. Initially

they would be faced with the great proportion of the million in the service

and commerce sectors out of work. In manufacturing they would be taking over

a highly fragmented industry with a multitude of small businesses the existence

of which depends very often on their complex links with the world economy

through

2.

Overseas

marketing expertise.

It is assumed that multi-national offices and facilities would pass to

communist corporations who would accept the employees as their own. It is

further assumed that in the first instance at least the output of small factories

that could not still be exported or stored would be accepted by the mainland

for distribution there. The problem would remain of ensuring raw materials and

component supplies to small firms and funds for the payments of their workers

vages. Overriding everything else would be the political, social and economic

necessity of ensuring an adequate standard of living for 4 million people.

The Hong Kong population enjoy better housing, more consumer durables, better

food and clothing than its mainland counterparts. Little could be done to

encroach on this without incurring political embarrassment both in Hong Kong

and on the mainland. The best time therefore for the communists to effect a

takeover would be at a time of economic depression in Hong Kong when living

standards seem threatened and the future viability of the market system is

in doubt.

CONFIDENTIAL