(b)
No Guarantees
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8.
EXCO have suggested language for the commitment which implies a stronger guarantee than the Governor is prepared to give. He will take them through his gameplan on his return. Even the language proposed by Sir D Ford leaves unacceptable ambiguity. The Chinese must be left in no doubt that, while the HKG will aim to preserve the Fiscal Reserves at a set figure, there must remain a possibility that they will fall below. Hence the commitment in the message to consult without any implied promise at this stage to agree on what to do in such circumstances.
9.
G
but
We are all clear that HMG cannot undertake any guarantee. If the Chinese press the Secretary of State in Peking to guarantee the HKG "assurance of firm intention", then this may have to be a breaking point. Throughout this negotiation with the Chinese, we must be prepared to call their bluff. They know it would be very damaging for Hong Kong and self-defeating for them to prevent the airport project: but it is a prospect we might have to contemplate rather than concede terms which would more seriously undermine the authority of the HKG.
(c) What do we get in return?
10. It is very galling to be contemplating a major financial concession to Peking in order to get them to back down on a series of other wholly unreasonable demands about the running of the airport project. But Chinese support is crucial to the project's success and it is not surprising that Peking should be determined to minimise the risk to them that the financing of the project will go awry, with the SARG left to pick up the pieces. They have insisted that, after 1997, Hong Kong must run a balanced budget and that Peking will not honour SARG debts which they have not approved in advance.
11. All the advice is that an agreement on PADS would have a dramatic beneficial effect on Hong Kong confidence and set important precedents for future financing arrangements; that it would break the negotiations to overload the deal with more generalised assurances of future co-operation etc (even if bankable assurances could be devised); and that we should be careful not to seek written assurances in the PADS context which would seem to detract from, or erode, the Joint Declaration. But the Governor will certainly impress upon Lu Ping the need for agreement during the Secretary of State's visit to Peking on an improved and more political relationship over Hong Kong. And, clearly, the PADS deal will have much more credibility if it is set against such a background.
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