TNAG-1370-FCO40-1816-Relations-between-Hong-Kong-and-China-1985 — Page 81

UNFIDENTAL MAN

2

That's the

point.

5.

These figures' on the share of China's gross foreign exchange earnings represented by its net and gross earnings from Hong Kong have to be interpreted with care. The gross earnings percentage measures the contribution sales by China to Hong Kong make to the extra funds China has in any year to spend on imports or add to its foreign exchange reserves. The net earnings percentage is the same excepts that the imports are those from places other than Hong Kong. Given that, apart from some processing agreements and other similar arrangements, there are no systematic links between China's exports to Hong Kong and Hong Kong's imports from China, discussions of China's dependence on Hong Kong should probably concentrate on the gross contribution of sales to Hong Kong to China's total gross earnings. The fact that China chooses to use some of its foreign exchange earnings to purchase imports from Hong Kong does not diminish China's dependence on Hong Kong as a source of foreign exchange earnings. It does, however, affect Hong Kong's dependence on China as a market.

6.

The degree of Chinese dependence on Hong Kong in terms of foreign exchange earnings depends on the ease with which China could find alternative markets for its goods and services. This is likely to depend on the nature of the goods and services involved. In this respect, China's exports to Hong Kong can perhaps be divided as follows:

(a)

(b)

(c)

Chinese exports of such items as live pigs, fresh vegetables, water and sand for which it would have difficulty finding alternative markets. For these items China has a high dependence on Hong Kong but the dependence tends to be mutual;

Chinese exports which are retained in Hong Kong - raw materials, semi-manufactures and finished goods which could be sold elsewhere but are most easily sold in Hong Kong. For these, Chinese dependece on Hong Kong is less but still significant. Satisfactory alternative markets might not be found easily;

Chinese exports which are subsequently re-exported. For these, which are now over 50% of China's exports to Hong Kong, the dependence is least as they are already utlimately going to other markets. However, although the goods involved are

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CONFIDENTIAL # 3