TNAG-1040-FCO40-1290-Future-of-Hong-Kong-1981 — Page 29

SECRET

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DSR 11C

3. Any initiative on Hong Kong might also have consequences

for their policy on unification with Taiwan: they will do

nothing over Hong Kong that would make this more difficult.

Increasingly, the Chinese see a connection between policy

towards Taiwan and Hong Kong. When Lord Carrington was in Peking in

April 1981, Deng Xiaoping said that we should study Chinese

policy 'towards Taiwan when considering Hong Kong. The

recogi 0766

A.

(the

essentials of present Chinese policy (see Annex A for

details) are that Taiwan mist give up its claim to statehood

and its flag but will then be allowed a large degree of local

autonomy, including its own armed forces. The parallel for

Hong Kong would be, as a minimum, (the relinquishing of

sovereignty in return for a negotiable degree of autonomy.

Current pressures on the Chinese leadership are such that

they are likely to do the minimum necessary to preserve the

advantages they gain from Hong Kong. They will avoid

specific agreements if they can. They may even be prepared

to suffer severe economic loss rather than take political

risks. Moreover we clearly cannot rely on the leadership

in Peking remaining constant. We cannot exclude the emergence

of a more ideologically and less pragmatically inclined

power group.

5. The Chinese apparently believed in 1979 that Deng's

general assurances about the interests of investors being

safeguarded would be sufficient to deal with the problem

of confidence for some time to come. This formula allowed

for what were, to them, significant guarantees about the

Hong Kong economic system and its probable continuity

(capitalism well into the next century) without giving

away anything on political control. They probably still

think this type of general assurance should be sufficient,

although there are some indications that they are beginning

to realise this is not so. Their initial remedy for a

slide in confidence is likely to be to repeat the

assurances more forcefully and more directly to leading

investors in Hong Kong.

I