TNAG-1920-FCO40-2724-Hong-Kong-water-supply-from-China-1989 — Page 2

The cost of the scheme is stated to be RMB 1,120 million at 1988 (1st half of year) prices, but due to inflation the Chinese Authority estimates the actual cash requirement to be around RMB 1,700 million on completion by early 1995. The Chinese Authority is looking to the Hong Kong Government to advance RMB 500 million (HK$

(HK$ 1,053 million) which is 30% of their estimated total cash requirement for the scheme. The rest of the capital would be secured as follows -

From the Guangdong Provincial Bureau of Water Conservancy and Hydro-Power

(a)

20%

(b)

20%

From Shenzhen

,

(c)

30% From the Guangdong Provincial Government

Based on the official rate of exchange Hong Kong' s contribution would only be 30%, but because our advance would

advance be in

in hard foreign currency the value of our contribution would effectively be much higher (possibly by as much as 50%).

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DWS held a preliminary meeting on 28 January with the Director of the Chinese Authority to find out more about the scheme and to establish what terms the Chinese side envisaged for the advance of capital by Hong Kong; in particular whether they would be prepared to consider this as a straight forward loan, carrying a commercial rate of interest.

7

The terms of the advance of capital are potentially very

contentious. The Chinese Authority reacted strongly against the idea of a commercial loan, to the extent of suggesting that they felt it could jeopardise the scheme. The points made by the Chinese side were that the scheme being a China/foreign joint venture, took into account the need for a stable and prosperous Hong Kong. The charging of interest from any

of the contributors would push up the cost of the scheme and hence the cost of water. This would cause hardship to the people of Hong Kong. This was against their intentions and could not be countenanced. The Chinese side indicated that they had already been approached by a Hong Kong consortium, offering to lend money for the entire scheme

entire commercial rates of interest and had turned them down for these very reasons. Despite this, on the basis of our knowledge of current economic conditions in China, we think that the Chinese Authority will

will face demands for interest payable on the sums to be advanced by Shenzhen and the Guangdong Provincial Government when concluding negotiations with those parties.

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