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Our assessment is that the Chinese Authority will continue to resist the idea of a commercial loan from Hong Kong for two principal reasons.
First,
they think it inappropriate that Hong Kong should charge interest on а project primarily for Hong
for Hong Kong's benefit; and secondly because a major foreign currency loan like this would probably require central government approval, and thus be subject to policy considerations at that level. The Chinese Authority has expressed serious doubts as
as to whether approval would be given, although t he Political Adviser's Office has been assured by other contacts in the Guangdong administration that joint ventures between Hong Kong and China will remain
Chinese Authority objects even to the use of the term in the proposed agenda. With this strong reaction, we need to consider our position
carefully before starting formal negotiations.
the
unaffected by economic controls. For what ever reason loan"
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The argument in favour of offering commercial terms is that interest should be charged to reflect the cost of the money being loaned by Government. On the assumption that Government will earn interest at a rate of not
rate of not less than 8.5% per annum on it s cash balances (1),
(1), it is estimated that, during the nine years between the commencement of the loan in 1989/90 and it s final repayment in 1998/99, the Government could earn interest of $533 million on a sum of $1,053 million. If this interest were foregone completely, the loan would be subsidized from general revenue.
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(a)
The arguments against an interest bearing loan are
insistence on this could jeopardise an agreement. Even if the Chinese Authority were to give way on the point, to seek approval beyond the provincial level would be a major and delaying complication. Agreement needs to be reached within the next few mont hs to give time for detailed planning design and construction bot h Hong Kong;
in China and
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(1)
A rate of interest of 8.5% per annum represent s the Government's view of the minimum return on cash balances likely to be obtained over the next 5 years.
CONFIDENTIAL
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