TNAG-1168-FCO40-1448-Future-of-Hong-Kong-1982 — Page 88

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Registry, pl. enter

and copy

to me.

CGE10/3 done fino 1013

مهام

106

Mr Clift HKGD

Minuted on this 11/3. (GEdgar 12/3.

HICK 04011

FUTURE OF HONG KONG

92

1.

No

CGE 15/3.

for 10/31

See (112)

128

284

(87

HICK 040/1

1981

Since minuting to you on 26 February, I have seen your submission of 1 March on the future of Hong Kong, together with the accompanying contingency paper. I note that the

view expressed in our earlier minute of 24 December that influential Chinese businessmen might be used to help make the PRC authorities more aware of the nature of the problem of business confidence.

2. I remain concerned that the contingency paper excludes any discussion of financial contingency planning. It is undoubtedly true that a political solution to the lease issue would be enormously beneficial for confidence. But it does not follow that financial contingency plans necessarily have no part to play in seeking to arrest a decline in confidence. As Mr Jay and I have argued before, the bearing of the lease issue on financial markets is complex; failure to negoitate a satisfactory solution over the lease is unlikely to be the sole cause of any financial trouble that emerges.

3.

As I understand it, the Hong Kong banking system, which would be the immediate focus of any trouble, is not tightly regulated. Despite the growing importance of Hong Kong in the international financial system and likelihood that a crisis would have far-reaching effects, Hong Kong has no central bank. While the Hong Kong and Shanghai Bank was willing to act as Hong Kong's lender of last resort to troubled financial institutions in the 1965 crisis, it will now be conscious of the much greater risks of doing so. There seems, prima facie, to be a disturbing gap in accountability and regulation here. HMG might be open to severe international criticism, as well as criticism in Peking and Hong Kong, if it was not seen to have taken in advance all possible steps to cope with a financial crisis.

4.

It might help if you write to Mr McLaren in Hong Kong to seek his views. I attach a draft of the kind of letter I have in mind. I am leaving today for a two-week trip to the Far East, in the course of which I will be stopping briefly in Hong

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/Kong