TNAG-1168-FCO40-1448-Future-of-Hong-Kong-1982 — Page 92

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the Territory beyond 1997, we should get a very good deal

and achieve a real foreign policy success. Without it we would

- have little effective bargaining power beyond China's own

perception of its economic interest in the Territory. I therefore

think that it would be sensible for us to clear our minds on this

issue of sovereignty in order to be ready with a flexible response

if the Chinese show themselves ready for realistic negotiations.

At the same time we should of course avoid making any premature

offers on the subject of which they could take advantage, and

we should only agree to consider a transfer of sovereignty in

return for a satisfactory undertaking from them on continuing

British administration, including the length of time for which this

would be guaranteed.

7.

There is of course the idea put to you by Sir Y K Pao of a

possible linkage between loans to China and a solution on Hong Kong.

•

I do not know whether this represents firm Chinese Government

thinking and I am sceptical of our getting a deal on Hong Kong

on this basis. But we are looking at the Pao ideas in order to

get a clear view of the advantages and disadvantages of a loan to

China both from the Hong Kong angle and on its own merits.

8. The next step will be to form a clear view of our own aims

before your visit in September. I doubt if the Chinese will be

prepared for full scale negotiations then but you will not be able

to avoid raising the subject. There is a reasonable chance that

you would be able to get agreement at least on continuing

C).

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/discussions