TNAG-1166-FCO40-1446-Future-of-Hong-Kong-1982 — Page 53

ODE 18.77

SECT

Reference..

heavily diversified and thus can sustain any loss without undue financial strain. As for British portfolio investment, it would be surprising if the (mainly professional) investors were over- committed in Hong Kong.

12. Those who would stand to lose most from an economic or financial crisis are the local Chinese. Only 10% of the local workforce in manufacturing is in foreign-owned companies. Local Chinese businessmen have been tightening their grip on the liong Kong economy through aggressive takeovers. China itself might not only find that the wider economic advantages it gains from Hong Kong might be prejudiced by a crisis but that its direct investment in Hong Kong property and finance was a risk. Some

estimates put the share of Hong Kong deposits with the Bank of China and its affiliates at a quarter or more. China Resources has a substantial investment in various property consortia with leading Hong Kong entrepreneurs.

13.

In summary therefore, it does not seem to us that a sudden loss of business confidence would necessarily result from uncertainty about the future of Hong Kong, nor that the problem of the leases is particularly serious in the short term. Both factors would over time lead to a decline in property prices; and this could exacerbate a financial crisis brought on by other things; but the main sufferers would be local Chinese, and the Chinese Government, rather than British interests.

14. If this is correct, it perhaps suggests that we should not try to push the Chinese Government against their wish into looking for a solution now to the problem of Hong Kong's future, unless we think there is a risk that they may become much more intransigent on the issue in future. To push the Chinese now could use up political capital we may need later. Might we perhaps consider a more relaxed approach until the course of events prompts the Chinese to raise it? In the meantime, however, there may be a case for encouraging local Chinese business leaders to lobby on their own behalf in Peking. We could at the same time tell the Chinese that we want an orderly solution to the lease issue and are happy to discuss it whenever they would like to but we need not push them into it.

24 December 1981

cc:

Mr Mallaby (o.r.) Mr Plender (o.r.)

Mu

Day

MH Jay

Planning Staff K114

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