TNAG-2422-FCO40-3524-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1992 — Page 76

CONFIDENTIAL

that the improved Hong Kong fiscal position would make this easier to contemplate in theory than at the time when (in a judgement shared by your officials and by the Bank of England) the HK$25 billion commitment in the Airport

Memorandum of Understanding seemed to be at the extreme limit of what was possible. However, it remains impossible for Hong Kong to capitalise its entire public service pension liability. The political, and therefore practical objections to capitalising HMOCS pensions alone and transferring these funds to the United Kingdom Government

are in my view unsuperable.

8.

Further confirmation of the Chinese approach came at the

24-26 March meeting of the Joint Liaison Group, where the

senior Chinese representative made a strong attack on Hong Kong's privatisation plans: he urged that Hong Kong should take no steps before 1997 to privatise the Kowloon and Canton Railway Corporation (KCRC), or otherwise unilaterally to dispose of the assets of the Hong Kong Government which

must be transferred to Chiną (and the SAR) on 1 July 1997. The Chinese are wholly indifferent to the economic benefits of such privatisation, which they explicitly stigmatized as selling of the family silver. When they take this attitude to such a straight-forward proposal, which would involve no transfer of funds outside Hong Kong, what prospect is there of their taking a dispassionate view of the transfer to HMG

of the capital value of HMOCS pensions?

9. I conclude that there is now no prospect of Hong Kong

providing the sterling safeguard or an adequate substitute

for it. This is not a question of any lack of will on the

part of the Governor or his government. Even if we

collectively judged it right to provoke the crisis with China that capitalisation would entail, it would not simply

be a question of instructing the Governor to make the

ARRAFI/4

CONFIDENTIAL