TNAG-0943-FCO40-1162-Future-of-Hong-Kong-1980 — Page 301

SECRET

10. I think clarification of this point would be sufficiently far for the Secretary of State to go on this issue when he visits Peking in the autumn.

11. However if the reply was sufficiently encouraging he might go on to the next step which would be to seek a more specific assurance that investors could have confidence that leases issued for periods that passed 1997 would be respected, whether issued for property on Hong Kong island, Kowloon or the New Territories.

12. If this basic principle were established, the final stage would be to seek Chinese agreement to leases being issued in the New Territories that passed 1997 and that their validity would be covered by Deng's assurance. The length of standard lease that would then be issued would be open to negotiation, but it should not be less than 20 years from the date of issue.

13. I think the only step that should be taken this year is that in paragraphs 10 and possibly 11 above, and that if Deng's response is positive, the Secretary of State should obtain agreement to state this publicly, and should say to Deng that in the light of this helpful clarification he would give further thought to the problem. I do not think we should act on paragraph 12 until we are quite sure that we will not receive a rebuff. In other words we should leave plenty of time perhaps a year or more for the Chinese to absorb the implications of the principle agreed, and to have had time to respond to the public pressure that would be mounting in Hong Kong for some sort of settlement.

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14.

When Philip Haddon-Cave visits China this spring or summer we do not think he should take any initiative to raise this issue. However if he were asked to speak about the state of the economy in Hong Kong and the possibility of economic cooperation with Guangdong, and if the audience was of a sufficiently high a level to make it worthwhile, he should include a statement to the effect that sooner or later confidence would be affected by the length of leases that could be issued for investment in the New Territories and then drop the subject dead. If pressed to comment further he should say that the problem was well known to the authorities in Peking, that it was for discussion between them and HMG, and that his only point was that the problem was real and would grow as time passed, and would have implications for the exchange rate of the Hong Kong dollar since, amongst other things, the cash flow of property developers would begin to be redeployed out of Hong Kong.

15. Since last year the Chinese drive to obtain assistance from Hong Kong over the industrialisation of Guangdong through joint ventures and direct investment has gained a good deal of momentum. It is not at all clear to me what the ultimate objective of the Chinese may be, though for the

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