CONFIDENTIAL
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that gross foreign exchange earnings from the Territory have remained a fairly constant proportion of the PRC's total earnings, that is Hong Kong's importance as a source of revenue is broadly unchanged. The fact that recently use of foreign exchange has led to expenditure on goods coming from and via the Territory is unconnected these funds could have been spent anywhere, though choices were made benefiting Hong Kong.
8.
In past discussion of this question three main ratios have been used to indicate the importance of the Territory (see my minute of 27 October 1982 to Morris, HKGD):
(i)
(ii)
gross earnings from HK as % of total PRC gross earnings;
as (i) but excluding re-exports through Hong Kong;
(iii) as (ii) but using net earnings.
The last measure suffers from the conflation of source and use, but does at least compare balances, whereas the net/gross measure used in Margolis' letter compares one balance with a gross total.
9. Paragraph 8 of the letter makes the important point that steps taken within China during 1985 to re-establish central control over use of foreign exchange is likely to lead to a fairly sharp cutback in growth of imports which will affect Hong Kong exporters (anecdotal evidence suggests this has already occurred).
10. Given the argument of paragraph 7 (above) I would not agree that the financial value of Hong Kong to China is altered as the letter suggests, since the gross figures relating the importance of the Territory as a source of revenue are the most significant.
28 October 1985
cc: Mr Ashton, FED
Mr Clark, RD (FE)
CONFIDENTIAL
Nick Hallett
N O Hallett
Economic Advisers WH426B
233 5335
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