TNAG-0844-FCO40-1054-Visit-of-Lord-Carrington--Secretary-of-State-for-Foreign-and-1979 — Page 4

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prospects, however, were good on energy (including coal and oil), railways and ultimately steel. The Chinese were interested in defence sales although, despite the poverty of their equipment, as had been demonstrated in the war with Vietnam, the military were being kept under a tight rein. The Chinese were in two minds about Harrier. They might not order large numbers but they would certainly look to us as a long-term defence supplier. Mr Cradock said that Sino/Hong Kong relations were at their best despite the problems over immigration. Deng was seized of the question of Taiwan where the Chinese wanted to see re-unification but without imposing their system of government. The present climate was the most favourable we were likely to get for an approach over Leases.

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Lord Carrington asked whether British businessmen were as persistent as their European rivals. Mr Cradock said that there were scores of British businessmen in China. British Steel had their own office in Peking and Rolls Royce had been there for years. We did not sell as much as the Japanese or the Germans but the political climate was good. It would be an over- simplication to say that civil trade depended on the sale of Harrier but there would undoubtedly be a commercial spin-off from our willingness to sell, even if in the end of the Chinese did not order Harrier. On defence sales in general we would have some difficulty in establishing precisely what the Chinese wanted. On some items, e.g. tanks, we might be able to offer to improve their existing equipment rather than supply them with new tanks.

5. Sir Murray Maclehose said that his own visit to China had shown China wanted to demonstrate the normality of relations with Hong Kong. Deng Xiao Peng had told him that Hong Kong could feel easy about its future because China needed Hong Kong. Just under half of China's foreign exchange earnings were generated by Hong Kong where the Chinese were investing in the shipyard, a machine tool factory and an oil depot.

6. Lord Carrington said that the Chinese would have to decide whether or not they wished to give an assurance over the New Territories Leases. Sir Murray Maclehose said that the last thing the Chinese wanted was a lame duck atmosphere and there were now signs that some firms were being deterred by the shortness of current leases. He now believed that the time had come to tell the Chinese how we proposed to tackle the problem and to do so in a written form which would not require an answer. We should go in to the Chinese quite soon, e.g. in mid-July at the latest. The changes would then be announced prior to Hua Guo Feng's visit to England. Lord Carrington asked whether what was proposed might be seen by Hong Kong businessmen as an attempt to pull the wool over their eyes. Sir Murray Maclehose said that what we were proposing could provide no guarantee, but the Chinese did not recognise the Hong Kong treaties so there never had been any guarantee. Part of the problem was that under British law the Leases expired in 1997, so something had to be done on that score alone. Our aim was to create circum--- stances where the Chinese could, if they wished, drift past the

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