TNAG-1041-FCO40-1291-Future-of-Hong-Kong-1981 — Page 7

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FUTURE OF HONG KONG.

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You had a word recently with Mr Mallaby about one or two comments Planning Staff had on your submission of 3 December to Sir E Youde about the future of Hong Kong. As Mr Mallaby explained, we had some doubts about the likelihood of a sudden and significant loss of business confidence arising from uncertainty in general about the future of Hong Kong beyond 1997, and an uncertainty in particular about the validity of 15 year leases due to expire after 1997.

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Since the question of business confidence is an important element in our policy on the future of Hong Kong, it may be helpful if I set out our thoughts in more detail.

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Seelin 040/1 It is clear that uncertainty about the future of Hong Kong will cause some lack of confidence, and that any measures that remove uncertainty will be a great help. But we are not convinced that the absence of a deal with China will in itself lead to an early, serious decline in confidence.

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To start with, the payback period on investment in Hong Kong tends to be very short. Except for a handful of giant projects, which the Hong Kong economy is in any case buoyant enough to do without, any investment undertaken in 1985 will aim to have paid for itself (and more) long before the lease is up.

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see Hier 0401 5. Furthermore the big British-run companies in Hong Kong,

128) 14/2 whatever they say about the lease for the official record, are not behaving as though they share the view that disinvestment is about to begin. They know that China is in no hurry to negotiate. They also know that they cannot fine-tune the sale of their own business interests: they are so big that the businesses would probably be unsaleable at anything remotely reflecting their value, even on the basis of likely earnings until 1997, if a buyer's market developed. So the time to sell would be now, while local Chinese entrepreneurs are aggressively extending their hold on the Hong Kong economy through takeover bids. Yet Jardine Matheson, for example, has been restructuring its capital to make itself less vulnerable to locally inspired takeovers. Other companies (Swire, Hong Kong and Shanghai, as well as Jardine) have taken out insurance by expanding their overseas interests in preference to disinvestment.

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6. Finally, the big local banking and trading houses are so diversified that the loss of Hong Kong profits and assets would hurt, but not dangerously: at the present rate of diversification, the lease worries will shrink in significance over time rather than grow.

7. You mentioned to Mr Mallaby your concern that once a sub- lessee had tested the validity of a Crown lease in the courts, and the courts had upheld it, there could be a rapid loss of confidence. But it seems to us unlikely that the property markets, in the absence of a deal with China, would attach much credibility to leases with a term exceeding beyond 1997; in which case a decision that leases were invalid would have little effect on confidence.

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