TNAG-1624-FCO40-2238-Relations-between-Hong-Kong-and-China-1987 — Page 176

CONFIDENTIAL #

16

23.

Although China's overall import demand slackened somewhat in the first half of 1987, Hong Kong's domestic exports to China grew rapidly during this period. In the second quarter of 1987, these domestic exports, at HK$6,852 million (US$878 million), were 63% higher than in the same quarter in 1986. It is believed that a significant proportion of the growth in Hong Kong's domestic exports to China in 1986 and in the first half of 1987 was attributable to increased outward processing activities in China. Most of these activities are known to be concentrated in the Pearl River Delta region. The very rapid growth in domestic exports and re-exports of intermediate products like textile yarn and fabrics to China, and the substantial increase in imports of wearing apparel from China, are indicative of this development. The rapid increase in road freight traffic in both directions is another indication. Apart from the influence of compensation trade and outward processing activities, it is likely that the strong Yen, the recent setback in political relationship between China and Japan, and China's concern about its economy becoming over-dependent on Japan as a source of supply, have

induced it to switch from Japanese imports to imports from other sources, such as Hong Kong

In any case, the

(12)

•

strong growth in Hong Kong's domestic exports to China under China's tight import controls illustrates the flexibility of Hong Kong businessmen in adjusting to the changing needs in the Chinese market.

(12) During the twelve months ending June 1987, the Yen

appreciated by 29% against the Renminbi, compared with an appreciation by 16% of the Hong Kong dollar against the Renminbi. Partly reflecting this, China's imports from Japan declined by 23% in money terms in the first half of 1987 compared with the same period in 1986.

CONFIDENTIAL **