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Annex A
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UK CONFIDENTIAL
CHINA'S DEVELOPING ECONOMIC LINKS WITH HONG KONG
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1.
China's economic relationship with Hong Kong is close and highly profitable. In addition to direct and entrepot trade through the colony China has substantial investments in various commercial and financial enterprises. Since 1978 in order to promote her exports of foreign currency-earning goods and to introduce foreign capital and technology at little or no cost in foreign exchange in line with new economic policy the Chinese have been involving numerous Hong Kong businessmen in the development of industry in China, especially through counter-trade projects
across the border in Guangdong Province.
Trade
2. Trade with Hong Kong now accounts for 12% of China's total foreign trade, and after Japan it is China's most important market. China provides nearly half of Hong Kong's
imports of foodstuffs and clothing, over a third of its building materials and a growing proportion of its petroleum requirements (30% in 1979). China also supplies
over a third of the colony's fresh water for both domestic and industrial use.
Moreover by exporting through Hong Kong China can reach markets which would otherwise be closed (eg Taiwan) due to consumer or political resistance to goods of overtly Chinese communist origin. In the first 6 months of 1980 China supplied over a quarter of Hong Kong's re-exports whilst purchasing 12% of them.
Investment in Hong Kong.
3. China has substantial and growing investments in all sectors of Hong Kong's
economy. China controls, either through direct ownership or control of sufficient
equity, banks, investment and insurance companies, shipping and travel companies, manufacturing firms as well as many retail outlets. Chinese investment compardes
have major stakes in the construction of large residential and commercial complexes,
warehouses, a cement works and many small projects. The 13 communist barda operuts
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