TNAG-1370-FCO40-1816-Relations-between-Hong-Kong-and-China-1985 — Page 76

CONFIDENTIAL

of China's total foreign exchange earnings, to underline Hong Kong's

value to China. The latest figures do not invalidate this fact. They do,

do, however, indicate tabat China's growing importance to Hong Kong as a market for its exports and re-exports. Is China likely to become more or less dependent economically on Hong Kong in future, and is Hong Kong likely to become more or less dependent on China?

6.

To answer the first question: it would not be easy for China to find alternative markets for its own exports to Hong Kong:

(a)

(b)

(c)

(d)

basic items such as live pigs, fresh vegetables, water and building materials would be very difficult to export elsewhere in the same quantities;

Chinese raw materials and manufactures which are exported to

Hong Kong and retained there could be exported elsewhere, if

markets could be found: but Hong Kong is the most convenient market for these cheap and "down market" goods. Finding other

markets might be difficult, and might also raise the cost;

Chinese re-exports through Hong Kong could theoretically

bypass the territory: but China presumably finds the entrepot

services available in Hong Kong most convenient to its needs;

Chinese services (eg down market tourist services) are well

suited to the mass Hong Kong market. They would be hard to

sell elsewhere.

A probable conclusion is that China's foreign exchange earnings from

Hong Kong, as a percentage of total foreign exchange earnings, are

likely to remain broadly static in the next few years.

7.

To turn to the second question: the growth in Hong Kong's exports to China has greatly benefited the territory at a time when

there has been growing protectionist pressure to exclude Hong Kong

from its traditional markets in North America and Western Europe. While the last year's trading performance may prove to have been an

exceptional one for Hong Kong, given that steps appear to have been

taken recently in China to reestablish central control over the

CONFIDENTIAL