TNAG-2590-FCO40-3778-Internal-security-in-Hong-Kong-1992 — Page 13

8 May 1992

CONFIDENTIAL

Copiel

A MKSB

Foreign & Commonwealth

Office

London SWIA 2AH

John Gieve Esq HM Treasury

HKC 440/1

HAY SP

File O

Dene John,

HONG KONG: RISKS OF SERIOUS DISORDER

CM

You asked me to let you have a view on the likelihood of serious disturbances in Hong Kong over the next few years, on

1.

a scale that might endanger financial stability and hence HSBC's position in Hong Kong.

2. What follows is a personal and necessarily speculative view, but I think that it is broadly representative of thinking in the FCO and among those most closely involved on the ground.

3. It is possible to think up all sorts of armageddon scenarios for Hong Kong, such as Chinese military invasion. But frankly these are so unlikely as to not be worth serious analysis. Hong Kong has in any case always been susceptible to rapid swings in sentiment from euphoria to despair. But after low points such as Tienanmen Square and Black Monday in 1987, confidence picked up rapidly. To produce a real threat to financial stability there would have to be some sustained and systemic collapse in confidence. broadly two categories of such risks.

There are

4. The first is Chinese political or economic interference leading to a severe loss of international confidence, a flight of capital etc. We are already seeing efforts by the Chinese to increase their influence on decision-making in Hong Kong. That will no doubt increase as 1997 approaches. But it is no surprise to anyone in Hong Kong. It is possible to think of circumstances in which this interference gets worse. There could be Chinese pressure on human rights, or efforts to restrict the Hong Kong Government's autonomy on economic issues. If we went further than they could accept on democracy, they might declare that the Legislative Council would be disbanded in 1997 and re-elected on a basis consistent with the Chinese interpretation of the Basic Law. The result in each case could be political rows, suspension of cooperation, etc. The question is at what point this would lead to Chinese action which would undermine confidence.

5. In that context it is worth recalling the powerful Chinese economic incentive to ensure that Hong Kong continues

POPALF

CONFIDENTIAL