TNAG-2453-FCO40-3571-Seminar-regarding-Hong-Kong-matters-hosted-by-Douglas-Hurd---1992 — Page 50

CONFIDENTIAL

Reminiscent

Itte

Costs saga.

-

1997 will be at least HK$25 billion, and the stipulation

in the BL that Hong Kong should continue to pursue a low

tax policy and to avoid deficits after 1997;

the Hong Kong dollar's links with the US dollar, which

rules out changes in interest rates as a tool of

management.

The worries about inflation (including on the Chinese side,

c.f. Li Peng to the Prime Minister) have inevitably

rekindled speculation about a change in the dollar link.

This would be for HKG to decide: they would have to be

persuaded that the disadvantages of an undervalued dollar

and high inflation outweigh ed the monetary stability

provided by the link which has been in place since 1983.

Meanwhile, HKG are in close touch with the Bank of England

(two senior officials are conducting a "health check" of

monetary management) and with the Treasury (a senior

official has been invited to go out and give advice on

budgetary planning).

19.

The Airport. Since September the Chinese have been

cooperative. But we are now entering a period where we will need rapid agreement from them on major issues if the airport timetable is not to slip.

The

20.

The most immediate issue is the Airport Railway.

overall cost of this is now twice as high as the figure

given to the Chinese in March 1991 (HK$22 billion as against 11.5 billion). This is partly inflation, but also includes costs omitted earlier, such as the cost of land and other refinements to the design. However, the HKG's share of the

overall costs has declined marginally to HK$3.7 billion. The rest will be made up of borrowing by the Mass Transit Railway Authority. The most difficult point for the Chinese will be that HKG are proposing to take on a contingent

liability of HK$6.8 billion (1992 prices) which the MTRC

could call on after 1997 if required in order to make up for

lower than expected rates of return. The question of such contingent liabilities stretching beyond 1997 was not dealt

FIZABP/7

CONFIDENTIAL

THE

AIRPORT