TNAG-1457-FCO40-1981-Relations-between-Hong-Kong-and-China-1986 — Page 29

CONFIDENTIAL

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the meeting was briefed on the latest state of play over road links. Traffic congestion on the Man Kam To road has become almost intolerable, (hardly surprising with almost 6,000 vehicles a day using the crossing), to a large extent because of the slow rate of processing on the Chinese side. It has subsequently been agreed that no new permits for the Man Kam To crossing be issued for the time being. Work on Lok Ma Chau is progressing smoothly. The Acting Governor urged that attention be paid to the need for sufficient capacity at Lok Ma Chau; and that certain sections of the New Territories Circular Road be upgraded earlier than is currently envisaged.

The meeting noted papers on: railfreight performance 1981- 85; the introduction of summertime in China; China Ferry Services; the latest CICC report; and immigration statistics.

Substantive discussion focussed on the quarterly economic report, a report on Economic Analysis Division's visit to Guangdong in March, and on a combined CEC/CICC paper on Hong Kong's infrastructural requirements in the light of growing links with China. The keywords for us appear to be flexibility and anticipation, in the absence of reliable projections from the Chinese. If we have surplus capacity in the early days of new facilities, that would be much better than being caught short.

In general, it was felt that the economics of Hong Kong and southern China would continue to develop in a complementary manner for the foreseeable future. However it was important for Hong Kong to continue to move upmarket. There might be painful readjustments in Hong Kong if there were a large-scale shift to the services sector, given that 35% of the workforce was currently engaged in manufacturing. Another potential problem would be a sudden inflow to Hong Kong of the Hong Kong currency currently circulating in China (between 15-20% of our total note issue), although there were no foreseeable grounds for this to happen. The meeting noted that, while Hong Kong contributed about 80% of external investment in southern China, the Hong Kong economy itself was not over-dependent on China. This could be seen from the fact that the domestic economy had so far this year shown an export-led recovery, while exports to China had declined.

space.

The next meeting is scheduled for 25 October, so watch this

Yous ever,

Chris

(C T Wood)

Assistant Political Adviser I

c.c.

D. Blunt, Esq., Peking

CONFIDENTIAL