CONFIDENTIAL
MDHO
132725
6969
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ARE
THE END OF THE DAY THE POLITICAL OBJECTIONS PARTICULARLY THE IMPOSSIBILITY OF SELLING A DISCRIMINATORY SCHEME TO LEGCO LIKELY TO DERAIL THEIR IDEA. I STRESSED ONCE AGAIN THE ARGUMENTS YOU HAVE DEPLOYED AND THOSE MADE BY SIR R MCLAREN (PEKING TELNO 2119). BUT THEY INSIST ON OUR GIVING FURTHER THOUGHT TO HOW THE CASE FOR A CAPITALISATION APPROACH WOULD BE PUT TO THE CHINESE, WERE MINISTERS TO OPT FOR THIS, AND THEY REPEATED THAT UNTIL CONTACT HAD BEEN MADE WITH THE CHINESE IN SOME WAY, THEIR MINISTERS WOULD BE BOUND TO QUESTION OUR ASSERTIONS THAT PEKING WOULD NOT COOPERATE (I NATURALLY ALSO MADE THE POINT THAT ANY DISCUSSION WITH THE CHINESE WOULD NEED TO BE VERY WELL PREPARED AND COULD NOT EXPECT AN EARLY RESPONSE). THE TREASURY TEAM ALSO FELT THAT WE SHOULD EXPLORE WHAT FURTHER REASSURANCES YOU MIGHT HAVE TO CONTEMPLATE FOR LOCAL CIVIL SERVANTS, IN CASE IT MIGHT BE POSSIBLE TO CONSTRUCT A PACKAGE FOR THEM WHICH WOULD BALANCE ANY SPECIAL TREATMENT FOR HMOCS. WE SHALL NOT BE ABLE TO BRING MINISTERS TO A SERIOUS DISCUSSION UNTIL WE HAVE EXPLORED THESE POINTS, SO I SHOULD BE GRATEFUL FOR YOUR THOUGHTS, AND ADVICE FROM UKREP JLG AND PEKING, ON THIS.
HYPOTHECATED LOANS
4. THE TREASURY DO APPEAR TO BE GENUINELY INTERESTED IN THE PROPOSALS THAT YOUR CONSULTANT IS CURRENTLY LOOKING AT FOR THIS. INDEED THEY SAY THAT MINISTERS WOULD EXPECT THEM TO ADDRESS SUCH A COMMERCIAL OPTION. THEY ALSO INDICATED AT THE MEETING THAT THEY MIGHT (MIGHT) BE PREPARED FOR HMG TO PUT SOME MONEY TOWARDS THE SCHEME TO IMPROVE THE TERMS SPECIFICALLY FOR HMOCS OFFICERS. THEY ARE PREPARED TO WORK ON THIS WITH THE BANK OF ENGLAND. BUT THEY POINTED OUT THAT UNLESS THEY HAVE ACCESS TO THE CONSULTANT AND TO HIS FINDINGS AS TO WHAT BANKS IN HONG KONG MAY OR MAY NOT BE PREPARED TO DO, IT IS IMPOSSIBLE FOR THEM TO REACH A FINAL VIEW ON WHETHER THIS IS A VIABLE PROPOSAL. THE HINT OF A POSSIBLE HMG CONTRIBUTION TO SUCH A SCHEME SUGGESTS THAT THE TREASURY MAY BE INTERESTED IN SETTLING FOR A SMALLER FINITE COST RATHER THAN A MUCH LARGER CONTINGENT LIABILITY. AT ANY RATE WE SHALL CLEARLY NOT BE ABLE TO GET CLEAR MINISTERIAL DECISIONS UNTIL THE TREASURY HAVE ESTABLISHED WHETHER BANKS OR FINANCE HOUSES WOULD BE WILLING TO PARTICIPATE, AND WHAT LEVEL OF SWEETENER WOULD BE REQUIRED FROM HMG TO MAKE ARRANGEMENTS MINIMALLY ACCEPTABLE TO HMOCS.
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TO THAT END, I THINK IT WOULD SAVE TIME IF YOU COULD AGREE THAT THE TREASURY SHOULD MAKE DIRECT CONTACT WITH YOUR
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