CONFIDENTIAL
5. Civil aviation. You will know better than I the HK complaints that BA are reneging on the agreement to relinquish the HK-Beijing route. It was suggested that the main reason for this was the need to put BA in the best possible light immediately before and after privatisation, until an election at least. There was clearly some feeling that HMG was not playing fair, and was trying to entrench the position of UK carriers post-1997. There also seemed to be some apprehension that conflicts of interest would emerge in negotiating a series of separate air services agreements in coming years. I said that I was not familiar with the subject, and that I assumed Mr Spicer's forthcoming visit would provide the opportunity to ensure that there was the mutual confidence without which it would be impossible to negotiate reasonably. (Is it clear that China will agree to the substitution of Cathay for BA ? If it is not, it would presumably not be helpful to let it be known that BA were moving out anyway.)
6. Cable television. HKG have soon to decide on the regulatory regime for cable television, which goes beyond the immediate issue because the cables can be used for all sorts of other purposes. Hitherto, they have had a regulated regime, with a franchise for the HKTC (Cable and Wireless), but they seemed to be leaning towards a more deregulated approach. Both of the bidders (B Tel and C&W) had hinted at invoking friends in high places if they did not get what they wanted, and there seemed to be some apprehension at this; I was asked, somewhat obliquely, whether there might be anything in it. said that I had no idea, but that it seemed highly unlikely to me. There had been concern about British competitors cutting one another's throats in third markets, but this case was different. assumed that HKG should decide on the basis of what was best for HK; deregulation, with the example of B Tel/Mercury in mind, had generally been seen as beneficial elsewhere.
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7. Turning to the economy, developments in the past year seem to have been highly satisfactory, in large part it should be noted, because of the competitive gains of following the $ down. (It should also be noted that HK paid a corresponding price when the $ was over-valued a couple of years ago.) Compared with 5 years ago, the physical changes are quite staggering, both in the amount of building on either side of the harbour and that all the way up the valley in Sha Tin and Tai Po. House building (80,000 units a year of public housing) seems, against all the odds, actually to be eating into the backlog of demand for the first time. Inflation is, however, beginning to look like becoming a problem indeed, it is rather a puzzle that it has not accelerated more in the past few months in the wake of the depreciation and pressure on domestic resources; unemployment is down to 2.1%, compared with the 3-3.5% normally thought of as full employment. One explanation put forward. is that the coincident movement of China's currency has kept down the food prices which are the main components of the consumer price
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CONFIDENTIAL
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