TNAG-2425-FCO40-3527-Hong-Kong-Her-Majesty-s-Overseas-Civil-Service-(HMOCS)-poli-1992 — Page 213

CONFIDENTIAL

3. 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 China (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 necessary arrangements: it would require an Order-in-Council over-riding the Hong Kong legislature's powers over finance.

This would cause a grave constitutional crisis and set a deplorable precedent for Hong Kong's financial autonomy

after 1997 as laid down in the Joint Declaration. It would

also go against the whole pattern of our constitutional

history and our relations with overseas territories.

10.

-

There is no dispute that, because of the general assurances originally given by Robert Carr and Reginald

Prentice, we already have a large contingent liablility in respect of Hong Kong HMOCS pensions. I strongly believe

•

that we should now openly accept the limited contingent

liability of our sterling safeguard proposal. This would be

good for the morale of key Hong Kong officials and police

ARRAFI/4

CONFIDENTIAL.