CONFIDENTIAL
to lay golden eggs. Hong Kong is already of significant economic importance to China (contributing one third of China's foreign exchange earnings, 80% of external investment in Guangdong Province, etc). Chinese investment in Hong Kong is increasing rapidly, and is now thought to be some £6 billion. China's economic stake in the continuing success of Hong Kong will grow as 1997 approaches and as a growing part of Southern China becomes dependent on and enmeshed with the Hong Kong economy.
6. It has always been our assessment that if China felt that its vital political or security interests were threatened by developments in Hong Kong, it would in the final analysis be prepared to cut off its economic nose to spite its face. But on the big political issues, Hong Kong is very unlikely to present such a threat. Reversion of sovereignty is already guaranteed. One possible area of risk is that the liberals in the Legislative Council in Hong Kong could step up dramatically their campaign for political change in China. At a certain point this could trigger an irrational Chinese reaction. But the trend is in fact in the other direction, with Martin Lee and his colleagues distancing themselves from organisations promoting democracy in China. Another possible break-point for the Chinese would be if they concluded that the Hong Kong Government were losing control in Hong Kong, for example by too much democracy or too much power to LegCo. But these are issues on which HMG will retain ultimate control until 1997, and the new Governor will no doubt be very sensitive to the need not to push the Chinese over the precipice on these issues.
7.
Another factor to consider is the prospects for political change in China. The Chinese leadership have evidently been trying to achieve economic reform without political reform. Our best guess is that in the longer term this will not be tenable. Economic reform has now gone so far that it will in practice be very difficult, if not impossible, to reverse it, particularly in Southern China. And political reform is likely to follow in its wake, if only slowly. It is of course possible that when the old men die, there will be chaos and instability in China before new leaders emerge.
In that situation, the protective insulation which Guangdong Province provides for Hong Kong should help. Even in previous upheavals (eg 1967), when China had far less economic stake in Hong Kong, the leadership took the policy decision that Hong Kong should be left alone.
8.
where
The second broad category is a breakdown of confidence in Hong Kong without direct Chinese interference. I know of no evidence that the level of anxiety in the population is increasing as 1997 approaches. Emigration, although high at about 60,000 a year, is not rising. We are indeed seeing some reverse emigration, professionals return to Hong Kong having established residence overseas. More and more Hong Kong businessmen are investing in or trading with China, which does not suggest any great phobia. Our impression is that the transfer of
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