TNAG-1370-FCO40-1816-Relations-between-Hong-Kong-and-China-1985 — Page 80

CONFIDENTIAL The Copal Ke Hallett

Hong Kong/China trade

TË Z

- China's dependence on Hong Kong

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Annex A

BU 22/0/85 Ez.

1

In recent months, Hong Kong's long-running visible trade deficit with China has swung into surplus. As Attachment A makes clear this swing has been building up for a number of years with exports from Hong Kong to the PRC, both domestic exports and re-exports, growing far more rapidly than imports into Hong Kong from the PRC. In 1984 the deficit, which had been declining relative to total trade for some years, fell absolutely. In the first half of 1985, the continued surge of exports to China combined with a slowdown in imports from China pushed the balance into surplus for the first time since 1951. This swing raises questions on the extent of China's continued economic dependence on Hong Kong.

2.

In June 1983 Economic Analysis Division produced estimates for the period 1977 to 1980 of China's gross and net foreign exchange earnings from Hong Kong as a proportion of China's gross overall foreign exchange earnings (Table 9 of "Hong Kong's Economic Value to China"). This showed that gross earnings from Hong Kong were about 28% of China's overall gross foreign exchange earnings and net earnings were, as would be expected, a lower proportion and probably falling (from 27% in 1977 to 23% in 1980). This table was used in support of the traditional view that China derived about 30% of its foreign exchange earnings from Hong Kong.

3

This table has now been extended up to 1984 (Attachment B) using the latest available data, including the most recent information on the China's Balance of Payments from the People's Bank of China. still incorporates a number of extrapolated figures.

However, it

4.

What the new table shows quite clearly is that, while China's gross foreign exchange earnings from Hong Kong as a percentage of its total gross earnings has remained fairly stable at around 30% and may have risen, China's net foreign exchange earnings as a percentage of its gross total earnings has fallen, from just under 30% to 20% and less. In view of China's trade deficit with Hong Kong in the first half of 1985, it is possible that Hong Kong will make no net contribution to China's foreign exchange earnings in 1985. This is primarily because China has increasingly used its foreign exchange earnings to buy goods (domestic exports and re-exports) from Hong Kong.

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RECEIVED IN REGISTRY 11 OCT 1935

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