TNAG-2494-FCO40-3626-Future-of-Hong-Kong-constitutional-development-Chinese-reac-1992 — Page 164

CONFIDENTIAL

!(8)

supplementaries covering more derailed points also attached at

Flag B.

4.

The Chinese position is not new. They took this line during

the airport talks. But this is the first time that they have trumpeted it publicly. Inevitably, it had an immediate effect on the stock market in Hong Kong which has dropped about 400 points in the last two days. It is now down almost 10% in the last week and is back below its level when the Governor made his

7 October speech.

5. The South China Morning Post reported that the Chinese move

was authorised by the top leadership, ie presumably Deng

Xiaoping.

has told HKG that the Chinese may

establish a Preparatory Committee for the SAR straight away. so, one of its jobs might be to decide whether individual contracts straddling 1997 are consistent with the Basic Law.

6.

If

That would institutionalise Chinese interference in the

running of Hong Kong up to 1997. It would be a clear breach of the Joint Declaration, and would further damage business confidence. Even if they do not push their challenge quite that far, they could do damage by holding up major HMG contracts and franchises. We do not accept as a matter of principle that we have to clear contracts straddling 1997 with the Chinese. But in practice, companies and their bankers will be very reluctant to make any financial commitments on such contracts if the Chinese side threaten that they will not be honoured. We have

so far consulted the Chinese only on HKG franchises and major

contracts. However, the Chinese statement suggests that they

intend widening the scope of consultation to encompass the full range of HKG contracts, possibly including those related to public works. There are not many such contracts at present, but

this will change as we get closer to 1997.

con.frn.ADM

SLM

CONFIDENTIAL

Redacted under FOI exemptions 27(1), 40(2) and 41.