TNAG-2468-FCO40-3592-Most-favoured-nation-status-for-China-Hong-Kong-interests-1992 — Page 122

CODE 18-77

Mr Furness

HKD

Reference

MAR 91/2

MFN REMOVAL ON STATE OWNED ENTERPRISES IN CHINA

Summary

1. Exports to the United States comprise one third of total Chinese exports through Hong Kong. Confining MFN removal to exports of state enterprises, village and township collectives would probably affect at least half of Chinese exports to the US or one sixth of Chinese exports routed through Hong Kong (figures overleaf). On HKG estimates this would lower Hong Kong GDP by around one per cent. The effect on Hong Kong confidence would be far greater. But in practice it would be

difficult to discriminate aginst state enterprises.

Detail

2.

In Guangdong province,

some 45 per cent of total exports in 1991 were from outward processing and foreign invested enterprises (i.e. not wholly Chinese owned firms) and 55 per cent were exported through state owned foreign trade corporations (FTCS). Only 17 per cent of exports from China as a whole are from foreign invested enterprises. Thus a conservative estimate of the share of state enterprises production in exports would be 55 per cent (including about 15 per cent for collectively owned enterprises). I can find no data on the producer origin of exports to the US.

3. Taking the latest Hong Kong estimate of the effect of MFN removal (9 March 1992) and assuming that targetting state enterprises reduces the coverage by 50 per cent, the effect on Hong Kong GDP would be a cut of 0.9 to 1.15 per cent.

4.

The above estimate is likely to be a considerable underestimate as Hong Kong confidence and its future growth prospects are closely linked to prospects in China and prospects for trade growth.

5. But in practice it would difficult to target state- owned enterprise exports;

a)

state owned enterprise production may be used as inputs for firms in Hong Kong and foreign firms in China and indirecty exported to the US.

b)

there would be difficulties in distinguishing between state owned enterprises, township and village collective enterprises which all export through state owned FTC's.

c) state enterprises are often foreign joint venture partners; about 70 per cent of 1991 contractual foreign investment was in joint ventures.