THE OUTLOOK FOR HONG KONG

Created: 8/25/1967

OCR scan of the original document, errors are possible

Intelligence Memorandum

The Outlook for Hong Kong

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Central Intelligence Agency Directorate of Intelligence7

INTELLIGENCE MEMORANDUM

The Outlook for Hong Kong Summary

Renewed Chinese Communist pressure on the British over the situation in Hong Kong raises new questions concerning tho immediate future of the colony and the prospects over the longer term. The increasingly fluid situation in Peking and the continuing "revolutionary" disorder throughout China make confident predictions of Chinesemore difficult than ever.

Nevertheless, China's demeanor in the past three months has led us to conclude that the Chinese authorities intended from the outset to keep the Hong Kong issue hot and to continue their support for dissident elements in the colony. We have also concluded that Pekingampaign aimed at gradually eroding the position of the Hong Kong authorities and thus preparing the groundew attempt by the localto seize de facto controlear or so. We believe that in the meantime the Chinesewill refrain from actions against the colony involving the risk of war, or even moves which would so disrupt Hong Kong as to put it out of business and thus deny Peking the vital foreign exchange earned there.

memorandum was produced solely by CIA.s prepared by the Office of Currentandcoordinated with the Office of Economic lesearch and the Office of National Estimates.

The latest Chinese Communist actions appear to bear out this analysis. The handing of an ultimatum to the British and the assaulte British Embassy in Pekingeries of humiliating British rebuffs to Chinese demands. These moves may have been partly in response to pressure from hard-pressed Communist leaders in Hong Kong for more significant support than Poking had beento their campaign. The sacking of the embassy did, however fulfill Peking's threat to the British of "serious consequences" without involving serious risks.

The Kong Kong Communists have probably been encouraged by these actions and can be expected to step up their efforts to create disorder. Recent Chinese Communist behavior and propaganda suggest, however, that Peking does not intend at this time to go much beyond the kind of action already taken to support the local Communist apparatus.

It does not appear likely that the Chinese Communists intend to attack across the border, but there are two possible actions stemming fromChina that could make the situation very difficult for the Hong Kong authorities. Hod Guard radical mobs, acting either on their own or under orders from Peking, could attempt an aggressive action against the colony. It seems likely, however, that the Gurkha troops could containove. More serious difficulties could arise if military authority in neighboring Kwangtung Province broke down and masses of Chinese refugees fled to the freedom of the colony.

The British have shown themselves capable of handling Communist terrorism and violence within Hong Kong itself. Nevertheless, the long term outlook for the colony is uncertain at best. Business confidence has been shaken and capital is beginning to flow out from the colony. Unless peace, however uneasy, is restored to therend could develop which might sharply reduce the rate of economic growth and lead to growing unemployment. This would provide the Communists with new opportunities and that may be what they are seeking. hange in leadership in Peking,

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however,onsequent change in Chinese ^ome of the losses it has suffered.

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Recent Background

burning of the British Embassy inonugust cane at the enderiodwhich Peking had probably becomeby the failure of the CommunistKong Kong to shake the position of thethe aftermath of the Sha Tau Kok incident on

8 July the colonial govarnraentigorous counterattack against Coiranunist efforts to create large-scale disorder.

were used to back up police fortime onulyuccessfuleftist union headquarters whichusedommand post for organizedhad plagued the colony foreek.

The morale of local Communist organizations was severely shaken by this raid and by subsequent moves against other control centers which put manyleaders behind bars.

The number of violent incidents and large-scale disorders fell off and by the end of July it appeared that despite continued sporadic terrorist attacks on the police and against publicservices, the authorities were well on the way toward breaking the back of the Communistood strike was cancelled and the strike against harbor facilities was increasingly ineffective.

Throughout this period Peking's propaganda, while encouraging the local Communists to carry on with their fight againstontinued to stress that the main burden in the struggle would have to be carried by the "compatriots" in the colony When three NCNA representatives in Hong Kong were arrested around the middle of July, the Chineseprotested vociferously and staged smallin front of the British Embassy inbut took no further action.

Now small-scale border incidents took place in early August but these do not appear to have been the result of orders from Peking, or even fromauthorities. Chinese troops guarding the

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border intervenedumber of occasions tomajor troubles from developing in Kwangtung. The most serious of these incidents"took place onugustang of Red Guard ruffians crossed the border and attacked the police post at Man Kara To. The Red Guards disarmed sentries andritish police official to sign an agreement tobarbed wire barriers near the frontier, and to pay compensation for alleged injuriesocal

farmer.

next day the British coolly"agreement'* on the ground that it had beenduress and proceeded to close the borderfor the rail crossing at Lowu. This prompted

a protest note from the Chinese Foreign Ministry onugust which the British rejected, although they later lifted restrictions at most of the border crossing points.

days later, onugust, theauthorities closed down three leadingnewspapers which had been printingand arrested key staff members. Thisto have been the last straw for Peking. Communists' prestige was already deeplyand their inability significantly tosituation had been repeatedly demonstrated.these circumstances Peking apparentlysomething had to be done and onugustForeign Ministry delivered ato the British charge demanding that theon the newspapers be lifted and thereleased withinours.

8. The British promptly rejected this note and the Hong Kong Government proceeded with the trials of the prc-Communist newsmen. Peking'swhen the deadline set by its "ultimatum" had passed was toed Guard mob to sack and burn the British Embassy. This outrage, the most serious actionoreign embassy since the Boxer Rebellion, was probably regarded by theCommunists as involving small risk and certain to succeed. It appears intended to intimidate the Hong Kong authorities, to satisfy the requirement

that the "serious consequences" threatened in the note be visited on the British, and to boost the sagging morale of the Communist apparatus in Hong Kong.

The Immediate Future

Kong Communist leaders haveencouraged by this new indication thatwilling to support them. ommunistthe colony has threatened an increase inactivity. His declarationewsonugust that the "liberation ofhasowever, appears to be nothinga boastful propaganda statement. Themay augment local pressure againstKong authorities by staging new bordersimilar to those which haveplace, but they will probably not go muchsuch action at this time.

blustering People'same day thethat Hong Kong wasand declared that tho "compatriots"colony had the "powerful backing of their In discussing the return of Hong Kongcontrol, however, the editorial saidit was unthinkable that the colony wouldbe under British rule and declared thatblood debts" would be liquidatedlater." Peking's propaganda still maintainslocal Communist leaders in Hong Kong mustfor the most part on their own resources in

the struggle against the British. 2 August NCNA account of the attack against the British carries this theme and implies that the "heroic fight" against the British will dependreat degree on the "perseverance" of the "Hong Kongho have the "backing" of the Chinese People's

11. ilitary attack across thefrom the mainland thus does not appear likely, there arc two possible actions that would make the situation exceedingly difficult for the British in

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Hon, Kon,. sthata^Guard

Kong Kong,

radicals, under the guise of "volunteers" aiding their compatriots in Hong Kong, may attempt aattack over the border. Under the conditions now prevailing in Chinaob might not beorders from Peking, bjit could be carrying out Mao's ambiguous decrees that it "is good to make

Such an attack could probably be repulsed by the Gurkha troops that are now manning the Hong Kong side of the border. Defense preparations have been underway for some time now and the local authorities think that they can contain this kind of aggressive action. In the event there ishowdown, the Chinese population of Hong Kong would probably universally support the British, since even the leftists appear to be in terror of Red Guard excesses..

A more difficult problem to handle would arise if thereudden, large-scale migration from Kwangtung Province over the border. Thein Kwangtung is atery fluid one, with disorders and turmoil reported increasing. If thereomplete breakdown in military authority there, it is possible that masses of refugeos would rush for Hong Kong. It is even possible that the Peking authorities might instigateigration,

In the springitherisunderstanding of what Peking wanted orreakdown in authority in Kwangtung, there wasarge-scale influx of mainland Chinese into Hong Kong. The colony was hard pressed to accommodate these masses andew drive for the free air of Hong Kong exceed thehinese that came acrosshis might swamp the ability of the local authorities to handle tne situation.

Short of these two situations, thethreat to the colony appears to be renewedby the local Communists to harass the security forces and to terrorize the population. Theprobably hope that through these tactics they gain willing support or coerce tacit acceptance of

their actions. The Hong Kong authorities have shown that they can deal with these tactics,and there is no indication that the British are willing to back down now.

The Long-Term Outlook

Nevertheless, the long-term outlook for the colony is uncertain at best. As yet the economy of Hong Kong has sustained no serious short-run The major manufacturing industries have not been disrupted and continue to earn profits andemployment. Entrepot trade has probably been reduced to some extent but still continues in large volume. Tourism, which provides the colonyhird of its nontrade foreign exchange earnings, has been temporarily curtailed to some degree, but it is still difficult to get reservations at first class Hang Kong hotels.

Despite this picture of "business (almost) as rack may be opening in the foundations of the colony's prosperity--the confidence of the local business community in the future of Hong Kong and the willingness of outsideto invest there. Hong Kong businessmen

ough-minded lot. Many are "refugees" from pre-Communist China who got out in timo with capital enough toew start. They recognize the vulnerability of Hong Kong to Chinese Communistoutrightmost of them have never planned investmentimetable that extended much more than five years into the future. As these men look ahead now after threeof Communist harassment, however, what they see is the prospectong campaign against the government-continuing labor agitation, terrorism, andefforts to destroy public security and make the colony untenable. In the background, so long as the militant Maoists are disrupting the mainland, they see the threatolitical explosion which might engulf them.

18. There are signs, perhaps nothing more than straws in the wind, that the confidence of the Hong

Kong business community has been seriously shaken.essimistic trend should develop, theover tine would mean stagnation or even ruin for the colony. The Kong Kong situation is such that the economy must maintain dynamic growth or face collapse. The near-continuous boom which has been going on for nearly two decades has rested mainly on the willingness of foreign capitalists, chiefly overseas Chinese, to invest money in the colony. As the colony prospered new capital was attracted from outside which accelerated the rate of economic growth still more.

19. Outside capital has become increasingly important in maintaining this cycle, but theof foreign investors to put money into Hong Kong is strongly conditioned by their reading of local attitudes. Pessimism on the part of local business- leaders leads to growing caution among Current symptons of uneasiness in Hong Kong are already having this effect. There haslow of capital from the colony and bank loans to small businessmen have become tighter. There are reports that some wealthy Chinese business men have concluded that the boom is over and are planning to liquidate their assets. Partly into this, American and Japanese investors, who have been largely responsible for developing newin recent years are now expressing serious reservations in regard to further investment in the

colony

20. Thereeal danger that without ato stability and business confidence in the next six months orong-range downward trend might develop. Lack of new investment and aof the rate of the colony's economic growth would, over time, bring about rising unemployment. This would provide the Communists with newand perhaps with much-needed local support. Strikes and demands for economic and politicalmight then be far more successful than they have been in the past few months and this would further sap the business community's confidence. It seems probable that this is the outcome that theare presently bankinga takeover of the

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colony from the outside by military meansteady erosion from within that will give the local Communists the whip-hand and resultituation resembling that of Macao.

Finally, as long as the Maoist fanatics continue to insistiteral playing out of the current interpretations of Mao's thought, constant pressure on the colony can be expected. If new leaders come to power in Peking, however, and turn to more moderate and pragmatic designs in an effort to restore inner stability on the mainland, the force behind the Communists' campaign in Bong Kong will probably abate. An equilibrium can beand Hong Kong, which will havelow from which it will be slow in recovering, will settle into an uneasy peace with somewhatprosperity.

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