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5. Roughly estimated, its external trade is four/fifths re-exports of goods de- stined for South China from overseas or from North China, or vice versa. In- creasingly important as local manufactures, not specifically related to shipping, have recently become, they do not account for more than a small proportion of the Colony's business. In the main, therefore, Hong Kong is but a mirror of conditions in China, one quarter of whose trade with overseas it handles. If conditions in China, whether because of general depression or as a result of protective tariffs, are such as to restrict trade, this Colony's entrepot trade must shrink proportionately.

6. In this connection it should be noted that Hong Kong Trade Statistics are far from satisfactory. To begin with they are intermittent and, moreover, there was a hiatus between the years 1925 and 1930 during which period no figures were re- corded. Even now it is not possible to draw positive conclusions from the figures available for the reason that they are figures of entrepot trade and there is indication what percentage relates to local consumption or to manufactures in the Colony. The same caution should be given in respect of figures relating to popu- lation. The difficulties of census taking in the East are notorious and Hong Kong is no exception in this respect, but for all that, the census returns are a mine of valuable information and it is a pity that so long a period as 10 years intervenes between each successive census.

7. It would, of course, be incorrect to say that all the goods handled in Hong Kong, except the small quantity retained for local consumption, are proceeding to or from China. The excellent shipping and warehousing facilities offered by the Colony, together with its geographical position as a terminal port, place it in a very favourable position to perform entrepot and transhipment services on behalf of other Asiatic countries besides China. This is an important factor in its prosperity and one which should be encouraged, but the fact remains that the real basis of the Colony's commercial existence is, and must continue to be, the handling of the trade of China.

8. This very important function which Hong Kong renders in effecting the ex- change of South China's products for those of overseas countries does not proceed from the mere fact that Hong Kong possesses an excellent harbour but rather from the fact that between Shanghai and Indo-China there is no other deep sea harbour having at the same time convenient access to the interior as well as safe anchorage and efficient equipment and facilities. Goods in transit to or from China must in the main be conveyed in deep draught ships and they must at some stage be discharged into smaller coasting ships or into warehouses ashore. As long as Hong Kong offers peculiar facilities for this operation so long will it continue to flourish by performing an essential service to the benefit of both China and the Colony.

9. The volume of this trade between China and overseas, as will subsequently be shown, has shrunk considerably in recent years. It is subject to two main in- fluences neither of which can be affected by any policy taken locally. If for reasons of world impoverishment or high tariffs elsewhere, China cannot market her pro- ducts, it follows that she cannot afford to import, and, as her foreign trade must be reduced, Hong Kong must suffer proportionately. Of equal importance is the industrial development of China. This development is proceeding apace partly as the result of economic evolution and partly in consequence of China's recently adopted policy of economic nationalism. Inevitably, therefore, China's trade will eventually be transformed and though her imports may gradually increase they will tend to consist of capital goods such as machinery and technical equipment rather than of consumable goods themselves.

10. It is, however, reasonable to anticipate that although the nature of the trade will change, Hong Kong will probably for a long time to come continue to fulfil its natural role. The arbitrary imposition of tariffs and taxes may prove irksome to the intermediary merchant in the Colony as these cause sudden dislocations of business. The direct importer of foreign goods in Chinese territory is, however, under the same disability. There is no reason to fear that local merchants will lack enterprise and fail to adapt themselves to altered circumstances, or that the port will not be provided with the shipping facilities and connections with the interior necessary to maintain its position as the ocean gateway of Southern China.