TNAG-1235-FCO40-1548-Future-of-Hong-Kong-1983 — Page 39

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Examining the first half of 1981 the trade surplus for China with Hong Kong increased, but at a mere 2.2 per cent, considerably lower than the 21-26 per cent recorded in the same period in the previous two years.

A change in these trends must quickly occur if China is to avoid serious problems. Foreign exchange is needed by China in large quantity in order to support the modernization goals. In the past, China imported a great deal from the developed world, mostly machinery, equipment and materials, and covered the resulting deficit by exporting large quantities of consumer goods to the de- veloping world. In this process, Hong Kong was easily the largest supplier of foreign exchange for China. A diminution of earnings from Hong Kong means that the established pattern will work less well and changes must ultimately be made--total imports of equip- ment etc. can be cut back or held down (with serious implications for the four modernizations program), efforts can be made to in- crease sales to the developed countries (hard to achieve with in- creasing protectionism and success for China would invite tighten- ing up by the developed countries against China), or efforts can be made to increase sales to other developing countries (already often high and hard to increase with slow international growth rates and the industrialization of many Third World countries). Any effort by China to promote sales in this way will increase the competition for other developing countries, not a light matter under current conditions of international recession. It would be possible for China to reduce imports from Hong Kong and directly tackle the prob- lem of a deteriorating balance of trade but this would involve two unpleasant side-effects: it would make it harder to carry out the four modernizations policy and it would interfere with the inten- tion to promote Guangdong and Fujian provinces, possibly endan- gering the success of the special economic zones.

The third major change in the relationship between China and Hong Kong is occurring in the traditional entrepot status of Hong Kong. Since the early 1950s this declined in the face of changed policies in China and the industrialization and general development of Hong Kong. The traditional entrepot role has begun to re- emerge strongly in the last few years, as China opened up to the world and increased its reliance on foreign trade. In the early 1950s exports from Hong Kong were mainly re-exports but these fell as a proportion of total exports to 30 per cent by 1959, the year that re-exports were first separated from domestic exports