SECRET
GR 500
SECRET
FM HONG KONG 10083DZ JUN 83
331
MKK04011
RECEIVED IN REGISTRY NO, 51 17 JUN 1983
TO PRIORITY FCO
TELEGRAM NUMBER 791 OF 18 JUNETOD
INDEX
PA
INFO PRIORITY PEKING (PERSONAL FOR AMBASSADOR)
RESTRY in: Take
FUTURE OF HONG KONG
1. MINISTERS MAY FIND IT HELPFUL TO HAVE A BRIEF SUMMARY OF THE
PRESENT SITUATION IN HONG KONG, PARTICULARLY AS REGARDS THE STATE
OF CONFIDENCE.
2. THE ECONOMY IS STILL SUFFERING FROM THE EFFECTS OF THE WORLD
RECESSION, WHICH CAME LATE TO HONG KONG, AND THE COLLAPSE OF
PROPERTY PRICES WITH ITS CONSEQUENCES FOR THE DOMESTIC FINANCIAL
SECTOR. BUT THERE ARE NOW SIGNS OF AN EXPORT-LED RECOVERY. THE
VOLUME OF DOMESTIC EXPORTS IS PICKING UP, AFTER HAVING FALLEN
LAST YEAR: UNEMPLOYMENT IS ALMOST CERTAINLY FALLING: THE STATE
OF MANUFACTURERS' ORDER BOOKS IS GENERALLY ENCOURAGING. THE
PROSPECTS LOOK BRIGHT FOR FURTHER IMPROVEMENT LATER IN THE YEAR.
3. THE UNDERLYING ECONOMIC SITUATION HAS THEREFORE IMPROVED. BUT
THE EVIDENCE OF RECOVERY HAS SO FAR HAD LITTLE EFFECT ON THE MARKETS.
THE PROPERTY SECTOR REMAINS DEPRESSED. THE HANG SENG INDEX IS
AROUND HALF OF ITS MID 1982 PEAK AND THE VOLUME OF TRADING HAS BEEN
CONSISTENTLY LOW IN RECENT MONTHS. BUT THE MAIN PREOCCUPATION IS
THE SHARP DECLINE IN THE EXCHANGE VALUE OF THE HONG KONG DOLLAR.
THE TRADE WEIGHTED INDEX FELL FROM 89.5 AT END MAY 1982 TO 73.8
AT END MAY 1983. THIS HAS BEEN CAUSED PARTLY BY THE SURGING STRENGHT
OF THE U.S. DOLLAR BUT ALSO BY INCREASING ANXIETY ABOUT THE FUTURE
WHICH HAS ENCOURAGED A SWITCH FROM HONG KONG DOLLARS TO U.S.
DOLLAR DEPOSITS.
4. PUBLIC CONFIDENCE IS FRAGILE. THE CAMPAIGN WAGED BY THE CHINESE
OVER THE PAST NINE MONTHS HAS HAD A CUMULATIVE IMPACT. IT IS NOW
WIDELY ACCEPTED THAT THE CHINESE INTENTION IS TO RECOVER SOVEREIGNTY
AND CONTROL OVER HONG KONG IN 1997. ALTHOUGH THERE ARE WIDESPREAD
DOUBTS ON WHETHER THIS COULD BE DONE IN A WAY WHICH WOULD
(AS THE CHINESE CLAIM) PRESERVE THE TERRITORY'S PROSPERITY AND THE
FREEDOMS NOW ENJOYED BY HONG KONG PEOPLE, THERE IS ALSO A GROWING
BELIEF THAT A CHINESE TAKEOVER IN 1997 IS INEVITABLE. THOSE IN THE
ENTREPRENEURIAL, MANAGERIAL AND PROFESSIONAL CLASSES WHO ARE
MOBILE OR POTENTIALLY SO ARE BEGINNING TO MAKE THEIR DISPOSITIONS
ACCORDINGLY. THERE HAS ALREADY BEEN A MARKED RISE IN THE NUMBER
OF APPLICATIONS FOR RESIDENCE OVERSEAS, IN SOME CASES ACCOMPANIED BY TRANSFERS OF ASSETS. THE NUMBERS ARE NOT YET VERY SIGNIFICANT
IN ABSOLUTE TERMS BUT THE TREND IS THERE.
5. THE HONG KONG GOVERNMENT IS MAINTAINING THE LEVEL OF EXPENDITURE
ON RECURRENT SERVICES AND INVESTMENT PROGRAMMES DESPITE A LARGE
BUDGET DEFICIT IN 1982-83 AND A LIKELY DEFICIT IN 1983-84. IT IS ALSO MAINTAINING THE IMAGE OF A GOVERNMENT CONFIDENT IN THE FUTURE
AND GETTING ON WITH THE BUSINESS OF THE DAY. BUT THE NEED TO
MAINTAIN CONFIDENTIALITY IN THE TALKS, AND TO AVOID A PUBLIC CONFRONTATION WITH THE CHINESE OVER THEIR PLANS HAS PRECLUDED US
SECRET
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