TNAG-2892-FCO40-4165-Transfer-of-assets-from-the-Hong-Kong-Government-to-the-Spec-1993 — Page 33

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financial assets to HMG before or on 30 June 1997, and then to

grant them direct to the SARG. This approach would of course

be wholly unacceptable to the Chinese, and probably also to

the public in Hong Kong should they become aware of it.

Possible Solution

7. The ideal solution to this problem is to negotiate with

the Chinese a legally binding instrument which would require

the HKG to pass to the CPG on midnight of 30 June 1997 all its

assets and the CPG immediately to pass these to the newly

created SARG, and which would not involve the physical

movement of assets. Such an instrument would probably need

HMG and HKG as well as the CPG as parties. It is difficult to

predict how the Chinese would react to this proposal. It could have some attraction for them, particularly if they were

concerned that in the absence of an agreement HMG might syphon

off HKG assets before 1997. On the other hand they could:

demand a full list of HKG's assets and their value

- demand that HKG cannot dispose of any assets before the

coming into operation of the agreement without their consent and try to use this as a means of reopening the issue of the

amount of reserves to be left to the SARG

8.

argue that an instrument of this sort is not necessary as all HKG's assets will pass to the CPG anyway.

There are obvious dangers in our raising this subject

with the Chinese and it would probably be better to do so

later rather than sooner. We might in the meantime consider

whether there would be any opportunity to obtain a better

indication of their thinking on when they propose to establish the SARG, and to quietly impress on them the enormous legal

and practical difficulties which would result from any

assets.paper/MONEY/bp

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