TNAG-2451-FCO40-3568-Future-of-Hong-Kong-constitutional-development-1992 — Page 7

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CONFIDENTIAL

let Sino/British contacts in other areas continue largely

But we do not know how long this will last.

unaffected.

But

The immediate issue is whether support for the Governor's package will hold up in Hong Kong. At present, the Hong Kong Government think they can count on the firm support of about half of LegCo. It will be helpful to have the Governor's

assessment on 18 November. So far the markets are resilient

(suggesting that investors are taking a long term view). members of the conservative grouping in LegCo, and some parts of the business community, are already backing away from

support for the Governor's proposals. We cannot rule out the

Chinese engineering a collapse of business confidence in Hong Kong if they push hard enough, or that they may create such a collapse by miscalculation.

We therefore face a long period of struggle. Calm nerves

will be needed. We should continue to show that we are ready to continue a normal relationship with China, both over Hong Kong and more generally. The visit here by Vice Premier Zhu Rongji (16-18 November) will be helpful in that. It will give

us the chance to show robust support for the Governor's

proposals, and urge the Chinese to put forward counter proposals rather than just criticise. But given Deng Xiaoping's instruction, they will almost certainly refuse to do so, and rely on outright opposition.

One option in these circumstances would be to make no

serious effort to engage the Chinese in discussions, and to

put all our efforts into sustaining the support in LegCo for the Governor's proposals in their present form. We would be playing for very high stakes and the Chinese have many forms of economic and political blackmail at their disposal. Rejection of the proposals by LegCo would be a serious blow to the Governor's authority.

CONFIDENTIAL