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Hong Kong's largest trading partner; domestic exports to China increased in the quarter, and the rate of decline in re-exports slowed. Hong Kong's domestic exports to China were showing a shift from consumer goods to capital goods and light machinery. Itwas likely that Chinese efforts to increase her exports would increase the amount of business put through Hong Kong. The recent devaluation would probably assist this, but it was too early to judge the overall impact. New Hong Kong investment in China continued to be made, while China's financial activities in Hong Kong continued to diversify. The meeting noted that by any other standards than China's own recent ones, China's growth rates were very good.
It was felt that Hong Kong's economy was generally becoming more exposed to developments within China. Interlinking of the two economies continued to strengthen, particularly in terms of the cheap labour supply in China; and there was some relocation of Hong Kong industries (principally outward processing arrangements) to China.
In this connection, we considered an updated paper on Hong Kong's relations with the Shenzhen SEZ. Our conclusions were much as I have reported earlier: the relationship between us is essentially complementary and Shenzhen has not yet proven itself to be a real competitor in terms of attracting foreign investment or competing for overseas markets. However, the rapid pace of developments
in Shenzhen meant that we need to remain alert.
We also considered, in rather quicker time, a report on a visit by the Economic Analysis Division of ESB to Shanghai in June, (a copy of which I have sent to Trevor Mound); and a report on the problems facing joint ventures in China, (copies sent to Anthony Layden, Richard Fletcher- Cooke, Charles Parton, Nick Hallett, and to BTC here).
Yous ever, Chns
(C T Wood)
Assistant Political Adviser I
c.c.
D G Blunt, Esq., Peking
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