TNAG-1166-FCO40-1446-Future-of-Hong-Kong-1982 — Page 11

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short-term profits to be made, particularly in the property field, but also because it is these

locally-based businesses which themselves see the risk of starting any kind of confidence rot by a major movement of funds. At the same time, as you point out, they are covering themselves by extensive balancing investments outside Hong Kong.

5. You say in paragraph 12 that those who stand to lose most from an economic crisis are the local Chinese. This is of course perfectly true in the most direct financial sense. But it does not alter the fact that the problems for the British Government in such a crisis would not be any the less because the main British trading houses and banks have covered themselves by investment elsewhere. There would be serious difficulties in our relations with other major investors, eg the US, Canada, Australia and Germany. More importantly, we would have to go on trying to run Hong Kong at a time when social as well as economic confidence was slipping. There would certainly be serious problems on the immigration side with many people trying to get into the UK.

The Property Market (your paragraphs 8, 9 and 10)

6. I take your point that there are a number of other factors besides 1997 which could affect the Hong Kong economy. But I think that you underestimate the proportionate significance of the lease question. While an economic crisis in Hong Kong could indeed start with a collapse following excessive speculation or with a further decline in Hong Kong's markets abroad, I think that without the lease problem Hong Kong. would still have a very good chance indeed of recovery. After all, the Territory has shown extraordinary buoyancy during the 70s weathering both major world recession and at least one collapse in property prices arising from the end of the 60s. Hong Kong has a much better record on commercial versatility than most comparable industrial and financial areas. But with the problem of the lease added in I think that it would be extremely difficult to foresee similar powers of recovery in the 80s and 90s. I simply do not think that the prudent measures by the Hong Kong Government which you suggest in your paragraph 10 would be effective in such circumstances.

HMG's tactics

7. I therefore do believe that the problem of the lease represents.a very serious threat to confidence although no accurate forecasts on the timing of any crisis can be made and I accept that Hong Kong may continue to avoid a slide for some time yet. At the same time I must emphasise that we are not suggesting that we should push the Chinese Government into a solution against their wish. We recognise that that would be impracticable and could well damage confidence in itself if we got a rebuff. The recent visit by the Lord Privy Seal to Peking did show that the Chinese are thinking rather more seriously about the problem.

Even so, we have to be very careful not to assume that they will easily accept the sort of solution that we would like. At the same time there will be very strong expectations in Hong Kong and elsewhere

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