TNAG-1059-FCO40-1309-Guangdong-nuclear-power-station-project-1981 — Page 55

CONFIDENTIAL

largely on making our "best" offer, at least in general terms, ab invito.

This approach will have been observed by the Chinese (particularly in relation

to Hong Kong) and they will therefore expect a similar deal from us for

Guangdong.

Equity

Chinese experience with the Japanese-built Baoshang steelworks (which operated unsatisfactorily but allowed for no effective recourse on the contractors)

had led them to seek equity participation by offshore interests in the

Guangdong project.

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A joint venture entity is proposed between the Guangdong authorities on one

hand and a Hong Kong company (Hong Kong Nuclear Investment Company

yet to be floated) on the other. The equity split between these two organisations will be 60:40 in favour of the Chinese on a capitalisation representing 10% of project costs of $4000m.

The concept presents a number of fundamental difficulties and these are not

capable of further meaningful resolution until more is known of Chinese

expectations and attitudes.

The potential effect aß negotiations is difficult to discern in detail but

does have a bearing on:

the UK Government's commitment. The Chinese would like to see

HMG as an equity holder in Guangdong through a stake in HKNIC but

this is against Government policy;

- the Bank of China guarantee (qv) for the ECGD credit. The Chinese

starting position is that they should only offer guarantees in

proportion to their equity stake.

As the subject presents difficulties for the Chinese too (the concept of limited liability and recourse on them) it is hoped to remove the issue from the scene early in the negotiations.