FCO 21/541 Chinese-Hong Kong relations informants

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Mr. K.C. Jay telephoned during the afternoon of Tuesday, 9th December asking for an early meeting: accordingly I arranged to see his later that afternoon.

Jay said that he had asked for a brief discussion as he vas most concerned at the changing attitude on the part of local communists, including LI Cho-chih himself. Apparently, after my meeting with Jay on Saturday, 29 November, he had taken an early opportunity to inform LI of our discussion, and in particular my response concerning the South China Iron Works land at Tsuen Van. LI had immediately said that this was yet another example of the H.K.G.'s hardening of attitude against the communists. Jay claims that he attempted to explain to LI that this did not reflect a change in policy but for the X.I.Q. vas a normal and proper way in which to handle a land matter. Jay felt that LI was far from convinced on this and that undoubtedly he would be reporting back to Peking his version and interpretation of the H.K.G.'s attitude on the 8.C.I.W. land.

Jay said that he had asked for a rather urgent meeting as in the past week or so he had detected a very definite change in attitude on the part of leading communists and that to some extent this was reflected in the local communist press: bence the personal attacks on H.8. the Governor and the criticisas of the Festival of Hong Kong. Jay also thought that the H.K.G. policy on the S.C.I.V. land had probably put back the date of Mes. Martin's release. I immediately picked this point up and asked whether he was seriously suggesting that indirectly the H.I.G. was being asked to pay for Mrs. Martin's release. Jay hotly denied this but explained his rather casual comment by saying that it had been his firm expectation at the end of November that Mrs. Hartin would very soon be released: that in searching for a credible reason for her continued detention he could only assume that the Chinese had been influenced by what they detected as a change or hardening of H.K.G. and therefore British Government policy towards them. Be hastened to add that he personally, of course, appreciated that this was not the case but that LI and his colleagues had convinced themselves that there had been a change in policy on the part of the H.K.G. and Jay felt that it would take some time and a lot of good will on both sides before there was a change for the better.

(J. Cater)

16th December, 1969.

c.c.

Mr. J. Murray (P.C.0.) Hr. J.B. Denson (Peking)

D.S.B.

H.8.0.

3.8.8.

DECRET

Mr. Mupray

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29/12

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Political Adviser

SECRET

Mr. K.C. Jay telephoned on the morning of Saturday, 29th November asking for an early appointment: accordingly I arranged to see him at about 12.30 p.m. in the event, I had lunch with him and finally left him at about 3.45 p.m.

Jay started by saying that there was increasing evidence that Peking once again, after a rather blank period, was anxious to seek his advice on matters to do with Hong Kong and Britain. He and others, including LI Cho-chih, had been invited to Macau about 10 days ago to meet with a visitor from Peking - apparently from the Prime Minister's office. In the event, Jay had excused himself on the grounds that he did not wish to leave Hong Kong at that time and that in particular he had no wish to meet with HO Yin who was almost certainly going to be present at one or more of the meetings with the Peking visitor. Consequently, Charlie CHAN was invited to Macau in Jay's place. From later discussions it was Jay's assessment that the Facau meetings were of little value and were confined almost completely to very general topics.

Recently Jay had received a number of enquiries from Peking seeking his advice and views. These enquiries were in the main confined to such topics as the appointment of a new Governor, various H.K.G. policies and decisions, but the most important subject concerned the possibility of war between China and Russia. In this context Jay's views were solicited as to possible reaction of particularly the foreign population of Hong Kong, bankers and senior Government officials. Jay was further asked whether he had any advice to offer as to how China's views might best be put across to the Western world and in particular what action Peking might be advised to take in order to gain friends in the Western world. It was Jay's view that Peking, and in particular his contacts in the Prime Minister's office, were fully aware of his views on such matters but they were wanting him to repeat them in order that they might be used in policy discussions and decisions in Peking: Jay clains that he repeated yet again the importance of China enhancing and maintaining good relationships with Britain. Jay said that from previous communications with the Prize Minister's office he was avare that CHOU En-lai favoured improving relationships with Britain but that at this stage CHOU was seeking selected and known views "even from me" in order to strengthen his policies in Peking.

whilst in his office Jay told me that he was fairly confident that Mrs. Martin of the Hongkong & Shanghai Bank in Shanghai would soon be released and that she would soon be followed by Johnston of the Chartered Bank. Later, at lunch, after having taken some rather obvious measures to ensure that he was not over- heard, Jay said to me that his news about Mrs. Martin's impending release was quite firm: that the Shanghai authorities vere particularly anxious that the Hongkong & Shanghai Bank should reverse its decision to close down the Shanghai office, and additionally Peking would be pleased if the Hongkong & Shanghai Bank would represent their interests in the matter of the s.c.I.V. land at Tsuen Wan. These two factors, comments made recently by

SECRET

/contd....

SECRET

LI and broad generalisations from Peking suggested an early release for Mrs. Martin.

Jay said that Peking had now given further thought to the matter of the land at Tsuen Wan and now wished it to be known that they would be prepared to accept an offer of HK$9 million. Jay asked whether I would have this information passed back to the authorities concerned. I reminded Jay that several months ago I had said that the H.I.G. offer could be of the order of HK$7.8 million, with an upper limit of HK$8 million. I further reminded him of the latest discussion we had had on the S.C.I.W. land when I informed him that as a result of an approach made by Deacons on behalf of some "menbers of the Board of Directors" I had suggested that it might be preferable to leave further discussion in the hands of more orthodox channels i.e. the owners of the land or their legal representatives. Jay at once asked whether I was refusing to pass on the message:

I said that this vas certainly not the case, that I was merely reminding him of the position reached at a very recent meeting. Jay seemed a little put out by this and said that to him it seemed a very simple matter there were three possible courses of action: (1) to agree to the new Peking offer; (2) to turn it down, perhaps repeating the previous proposal of Br$8 million; or (3) simply to ignore this recent approach.

In a very broad and diffuse discussion over lunch, Jay made various points but the only points of consequence were:-

(1) his concern that the H.K.G. might be considering using another channel. This is a recurring these but one which he had not put to me for some months: I assured him that he was the only contact and that there were no intentions of changing the channel. seened reasonably satisfied with this answer but later took the opportunity of emphasising how unimportant Dick LEE and P.C. woo were to the communists, presumably an attempt to point out that if the H.L.G. were thinking of using either of these gentlemen it would be an error;

(2) Jay talked at some length in admiring terms as to how well CHOU En-lai vas playing his hand in Peking. Jay had no doubts whatsoever that CHOU was now by far the most important man in Peking but, being a politician, could not resist the temptation from time to time of making things more complex than they really need be. Jay felt that the only real threat at present case from the extremist, YAU Ving-yuen, but that this was a problem CHOU would resolve as and when he could find time to tackle it.

5th December, 1969

C.C. Mr. J. Murray (r.c.0.)

Mr. J.B. Denson (PEKING)

D.S.B.

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(J. Cater)

SECRET

MR MURRAY.

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With the Compliments of the

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Political Adviser

Mr. K.C. Jay telephoned me on the morning of Monday, 27th October asking whether I could see him fairly urgently: accordingly I arranged to see him at 4.30 p.m. that afternoon,

Jay started the discussion by saying how surprised he and local communists had been to learn of the detention in Shanghai of Mrs. Martin and Mr. McBain. Jay claimed that he personally had a little prior varning but that the news case as a complete shock to LI Cho-chih and other members of the communist hierarchy in Hong Kong. Indeed, Jay said that when he telephoned LI to tell him the news, LI vas quite convinced that Jay had mis- understood the situation and that in fact two more people had been released: in order to emphasise the complete lack of knowledge here in Hong Kong, Jay said that even next morning, after having beard the news on the radio, LI still did not understand the situation ("his Cantonese is very poor") and telephoned Jay rather triumphantly to say that Jay obviously had been in error later when LI had seen the news in the newspapers, he again telephoned Jay to apologise and then to ask for an early discussion. Mean- while, Jay claims, other communist leaders from N.C.N.A. and China Resources had also telephoned to say how surprised they were at the news, particularly in the face of recent instructions that positive action must be taken to improve relations with Hong Kong and Britain.

Allegedly the discussion between LI and Jay was very lengthy: at first CHAN Hung had been present at the discussion but after a while LI had sent him away so that both he and Jay could speak freely. It was their agreed opinion that the Shanghai de- tentions could be explained by one of the following:-

(1)

(11)

Mrs. Martin and Mr. McBain had in fact been found to be acting in contravention of the law: this they thought highly unlikely, particularly in the case of Mr. McBain who they understood had been unwell for some time and was only allowed out of bed for a fev hours each day;

it was a well known fact that the policies of Peking were not always acceptable to Shanghai and that this may have been an attempt on the part of the Shanghai authorities to embarrass Peking and at the same tine to indicate that they did not agree with recent policy changes in respect of Bong Kong and Britain: this explanation was considered far more likely than (i)

above.

There was a third possibility which Jay favoured more than the two mentioned above: be claims that in recent weeks the Hong Kong & Shanghai Bank had adopted a very soft line towards the Chinese and in particular the Bank of China: it was Jay's opinion that some members of the Bank of China, and in particular ̊CHAN Hang, had detected this and probably advised his contacts of the situation and that they, anxious to take advantage, had attempted to obtain bargaining power with the detention of Mrs. Martin. I informed Jay that I was not really impressed by this explanation -

/contd.....

in any event this might conceivably explain the detention of Mrs. Martin but what about Mr. McBain? But Jay had little hard information to go on and clearly was working on intuition and, it turned out, à feeling that the Hong Kong & Shanghai Bank had not consulted him on matters to do with the Bank of China and accordingly had made errors: by way of explanation he said that some weeks ago he had reported to me the unfortunate and rather stupid manner in which Martin Curran had accepted the 1. of C. invitation to the 1st October celebrations: at that time he fully expected that Jake Saunders would have consulted him about the invitation issued to Saunders in which event Jay would have strongly advised Saunders not to accept as he might find himself in a compromising situation, being head of Hong Kong's most important bank and at the same time à member of Executive Council. In the event, and to Jay's great surprise, Saunders had not consulted his and had attended the 1st October cele- brations "a very silly and stupid thing to do".

before

Jay

It was Jay's opinion that senior people in Peking did

he vas not know of the detention of Mrs. Martin and Mr. Kelain: quite sure, however, that the Shanghai authorities would have contacted somebody "probably somebody at a low level" acting in order that they might later claim that they had reported the matter to Peking before acting. It was Jay's opinion that Mrs. Martin and Mr. Mclain would be released "very soon" directly Peking had been able to rationalise the situation. said that he had over the week-end written a personal note to the Prime Minister's office asking for early consideration of the case and pointing out that his task of "red face" to the financial and commercial community in Hong Kong would be quite impossible if the Shanghai type of incident vere to be repeated. In particular, both Jay and LI felt that it was important to clarify recent instructions which seemed in conflict with the Shanghai action. Accordingly, LI was planning to go to Canton on Wednesday, 29th October and proposing to arrange a brief visit to Peking in order to press for an early solution to the Martin/McBain problem.

Jay clearly was embarrassed by the whole affair and time and again emphasised how shocked he and others had been at the news. I said that I and others had been shocked by the barbaric treatment that the Chinese had given to Anthony Grey and others but that this detention of Mrs. Martin and Mr. McBain vas utterly incredible and beyond all understanding.

Jay Visit of Mr. Stafford Northcote, Chartered Bank: expressed concern that lorthcote might, like Püllen last year, press for an interview with LI Cho-chih. This, according to Jay, would be a serious error: Jay had spoken to Mr. Peter Graham about the matter but Graham had said that, whilst he would not encourage Northcote to seek an interview with LI, nevertheless he could not stop him as Northcote is his senior officer and in any event would think it wrong not to take the opportunity of pressing for the early release of Johnston as and when the opportunity arose. Jay asked whether the H.I.G. could pass a message back strongly urging Worthcote not to seek openly or directly a meeting with LI. Jay was anxious that his name should not be associated with such a request "it might be bad for my

but he assured me that LI relations with the Chartered Bank"

had expressed concern that Northcote might seek an interview and was toying with the idea of staying in Čanton in order to save himself embarrassment✔y H

opinion that, with the

/contd..

possibility of Johnston being released soon, it would be the worst possible timing if Northcote were now to insist on an interview with the 1. of C. Manager. According to Jay, the proper thing to do would be for the Chartered Bank to invite LI Cho-chih to their cocktail party for Northcote: if LI found it possible to attend then other matters might develop.

Other matters discussed were:-

(1) VONG Cho-fan - Jay said that VONG had now been told quite firmly that be vas to behave reasonably and in accordance with Government's rules: Jay was confident that WONG would keep in line, at least for the time being.

(2) Newspapers Jay spoke at some length on the alleged improved tone of the Ven Wei Pao: be said that quite specific instructions had been given to the Wen Wei Pao and it was expected that in the weeks to come other communist newspapers would follow the softer line. Jay explained that Peking would find it extremely difficult to give precise instructions to newspapers other than the Ven Wei Pao but it was common for that newspaper to be considered the leader in political comment. As for the Ta Kung Pao, Jay believed that this paper would also gradually toe the line, especially now that its Chief Editor, Mr. FEI Yi-ming, had been disciplined.

(3) Petitions for retention of the Governor Jay said that 'of course you do not have to reply to this question"but locally the communists had been surprised that in recent days there had been what looked like a special campaign to retain the services of H.F. after his ters of office expires next April. Jay wanted to know whether these petitions had been inspired by the Governor himself. I assured him that this was utter nonsense : that the Governor vas just not that sort of person and that in any event a few seconds' thought would soon show in what an impossible situation the Governor would be placed if he had inspired such a campaign. Jay asked what then was behind the campaign: I suggested that it was a simple matter of a number of people and organisations genuinely wanting the Governor to stay on for a further term of office: that they had been impressed by the results achieved during his administration. Jay was still not satisfied by this and wondered whether among the petitioners vere those who were out for self gain: I said that of course this was possible but it was my belief that the majority were genuine petitioners. I also reminded Jay that it was common in Hong Kong for petitions of this sort to be raised whenever holders of certain posts like that of Governor, District Comissioner, Secretary for Chinese (now Home) Affairs left such posts: if a petition had not been raised in respect of such officers it would be taken as a severe criticism of their ability.

(4) Referring to a conversation of some four months ago, Jay said that in response to a question I had assured him that the British Government would not appoint a Chinese to be Governor or Colonial Secretary! he asked whether I would confirm this and accordingly I did so. Jay said that he was asking this question again as Peking had been surprised, in the light of this information, to read in certain newspapers that the British Government was now considering æpointing a Chinese as Deputy Governor Peking "thought it impossible" in the light of what had been said previously but would nevertheless like confirmation.

SECRET

/contd.

I said at

୯

once that my remarks concerning the posts of Governor and Colonial Secretary would of course apply equally to a post of Deputy Governor: that I had not mentioned such a post previously as there is no such post at present in Hong Kong. (5) South China Iron Works Jay said that he and LI Cho-chih had now had the opportunity to discuss this further and LI had asked Jay to inform me that, in respect of this 8.C.I.V. land, the cost to the B. of C. vas of the order of HK$11.28 million. He thought it yould be "a very good gesture indeed" if the H.K.G. were to increase their offer for this land to HK$11.28 million. I reminded Jay that the figure I had quoted to him some while ago of HK$7,8 million had only been årrived at after a great deal of consideration: that the H.K.G. and H.E. in particular had been anxious that such a price should be "fair to all concerned". I saw no possibility whatsoever of an increase of the magnitude now suggested being approved: vhen the offer had been made I had said that the outside limit would be HK$8 million. I further said that in any event my calculations of the loans outstanding, interest, etc., showed the sum owing to the B. of C. as being very much less than the figure quoted by LI and probably of the order of about HK$7 million. Jay said. that he would have the figures re-checked and speak to me later. Jay said that he had given further thought to the information I had passed on at our last meeting that the "Board of Directors" had made certain enquiries through Deacons about land conversion rates, etc.: Jay explained that some time ago the 3. of C. had insisted as part of the loan arrangements with the S.C.I.W. that the S.C.I.V. would only deal through Johnson, Stokes & Masters: it was clear to Jay that TSANG and other directors (not nominees of the 3. of C.) vere using the device of calling themselves "Board of Directors" and not the Company itself in order to circu vent this previous arrangement.

In discussing the whole matter with LI, LI had apparently suggested to Jay that the sooner the matter vas resolved the better and that Jay should put pressure on the K.K.G.: Jay clainS that he told LI to "use his head" on this using the Hong Kong & Shanghai Bank as the the transaction and Jay did not think that like doing favours for the B. of C, in the of Hrs. Märtin in Shanghai.

their plans envisaged main intermediary in the Bank would feel face of the detention

ле

(J. Cater)

29th October, 1969.

c.c.

Mr. J. Murray, CHG (P.c.o.) Mr. J.B. Denson, OBE (PRKING) D.S.B.

M.5.0.

B.3.5.

SECRET

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MR. MURRAY.

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SECRET

Political Adviser

Mr. L.C. Jay telephoned during the afternoon of 22nd October asking whether we could meet "soon": accordingly I made arrangements to see him next day for lunch,

Jay was in a happy mood smug and self-satisfied. He said that the previous day he had been asked to see LI Cho- chih concerning a message from the Prime Minister's office. Although the message vas in Fairly general terms nevertheless Jay thought it to be of substantial importance and a very definite indication of desire to improve relations between China and Britain and between China and Hong Kong. The main points made vare:-

(1) Jay was instructed to extend his contacts within the commercial and financial world and among senior civil servants. In particular, it was suggested that he should cultivate contact with H.E. the Governor and the Colonial Secretary.

(2) The need to improve relations with Britain was particularly important at the present time as China would find it necessary and desirable to have a friendly Britain to support her on the international scene.

(3) As regards the report made by Jay to Peking in September:-

(a)

(b)

(c)

(d)

Peking was pleased to receive such reports on the local Hong Kong scene and were anxious that Jay should feel free to subait such reports in the future as and when he thought it appropriate;

as to the release of British prisoners in China, this would be affected over a period of time: the time scale would not be as short as perhaps the British would want but the decision to release prisoners had been taken;

South China Iron Works Land at Tsuen Wan: Peking vere very appreciative of the offer made by the H.K.G. as it indicated to them that the H.I.G. wished to be helpful and friendly wherever practicable. The hope was also expressed that the fact that the Chinese were prepared to come to the H.K.G, with such a request would also be recognised as a gesture of good will · - an indication that they, too, would like to normalise relations. Some disappointment had been expressed at the low price offered but the instructions had been given that Jay and LI were to take the matter further with a view to reaching agreement in principle;

Peking had taken particular note of Jay's comments on the continued anti-British tone in the Hong Kong communist press. Instructions had already been given that the communist newspapers should tone down their editorial comments and get back to a pre-1967 posture. Jay's special comments on the TA KUNG PAO and its Chief Editor, Mr. FEI Yi-ming, had been noted and the necessary disciplinary action

/contd..

SECRET

· 2

(unspecified) was being taken.

Having passed the above messages to Jay, LI allegedly said that in the circumstances perhaps the Chinese could now expect some type of response from the H.I.G. and the British Government. Jay claimed that he feigned some anger at this and said that the message contained very little that was of specific value indeed he found the whole thing very much a re- hash of vague proxíses made over the past several veeks. LI then suggested that Jay should read the Peking message for himself (apparently an unusual thing as LI suggested to Jay that the latter might take the opportunity of looking at the report on the desk whilst LI went to an outer office to see to other business). Jay stated that he had been very pleased to see that the message vas couched in firm terms, vas precisely along the lines which LI said it was and undoubtedly gave him (Jay) a great deal of face. Although LI was well aware of Jay's "red-faced mission" in Hong Kong it vas important to Jay that it should be specifically spelt out: he felt that he had gained a great deal of face in LI's eyes.

Jay

In view of the message concerning the S.C.I.V. land, I took the opportunity of clarifying one or two points. confirmed that the object of the exercise to date, although spread out over many months, vas simply to confirm that firstly, the H.K.G. would be prepared to bay back the land at Tsuen Wan and secondly, to establish the approximate price which the H.I.G. would offer for such land. Jay Further confirmed that before any official approach vere made on this matter action will

have

n taken to ensure that the person/organisation making such an approach would have a clear title to the land without encumbrances. I enquired as to whether any definite decision had been made as to who would be making the approach: Jay said that as yet no decision had been made but that he personally favoured" operating through the Hongkong & Shanghai Bank. agreed earlier at a meeting with the Attorney General, I then informed Jay that Government had received a letter from Deacons, the solicitors acting on behalf of "the Board of Directors" of the 8.C.I.V. and enquiring whether the terms concerning the conversion of the land, läst mentioned in 1966, vere still acceptable to Goverment. I suggested to Jay that it was a little odd that such a request should have come at this time and might perhaps indicate a leak to the effect that the possible sale of the S.C.I.V. land was being considered.

categorically but suggested that at most it was a coincidence, that these people, noting the very high price being offered for industrial land, vere wondering whether they could make some quick profits. Jay then proceeded to talk at some length about the 8.C.I.V. problem: he said that TSANG (the main shareholder in S.C.I.V.) was "an absolute crook" and a very tricky customer *he way be trying to do something but there is nothing that be can do without the Bank of China approval". Jay said that it would be surprising to him if all the director of the S.C.I.V. had made the approach through Deacons as several of them vere the nominees of the Bank of China and it was inconceivable that they would act without first clearing their position with hia or LI Cho-chih. I asked whether it was possible that the directors vere thinking of attempting to obtain sufficient financial support to pay off the loans etc. to the Bank of China in order to be able to sell the land at a later date. Jay thought

appr

SECRET

/contd.

SECRE

this quite impossible: the Bank of China estimated that at the present moment the S.C.I.V. owed them in loan capital and interest something like HK$11.28 million.

Other Hatters discussed:-

(1) Sand Monopoly Jay said that he had now had the opportunity of speaking to both the Bank of China and China Resources concerning Mr. Henry FOX's claim that China Resources had put the price of sand up from $1.50 to $2.00 per cubic yard, Jay said that it was now quite clear that the original proposal had come from FOK himself ́and that the China Resources certainly in these circumstances would not expect to get the full 50%

increase. It was Jay's opinion that the H.I.G, should now reply to FOX saying that they had noted the contents of his letter but that they were not prepared to pay him any increase in the price of sand i.e. that FOI should be expected to absorb the alleged increase into his own costings. During Jay's discussions with the Bank of China and China Resources the question of a contractor arose. Both organisations thought that it would be advisable for the H.K.G. to obtain the services of another contractor - and in a later discussion with LI Cho-chih Jay had enquired whether, say, China Resources would be prepared to deal directly with the H.K.G. just as the Ivangtung authorities dealt with the R.K.G, on the supply of water: LI allegedly said that this would be a very good idea but expressed doubt as to whether the H.K.G. would approve as he and Peking were firmly of the opinion that "somebody in authority" vas anxious to see the monopoly continue in the hands of FOK. I informed Jay that this in any event was not a matter for consideration at the

oment as the H.K.G. was still under contract to deal with FOX.

(2) Shanghai branch of the Hongkong & Shi S. Bank should not

Bank Peking vere particularly anxious now that the H.1. & S. Bank should not close its branch in Shanghai. The feeling was that with the improved climate in relations it would be unfortunate indeed if the Shanghai branch were closed down. Jay had been asked to use his influence with Mr. Saunders of the bank to reverse the decision.

(3) Johnston Jay expressed concern that the Chartered Bank might attempt to obtain an interview for Northcote with LI of the Bank of China: in Jay's opinion the visit of Pullen to LI the last time Pullen was in Hong Kong was disastrous. Jay had great respect for the ability and judgment of Mr. Peter Graham, the local Manager of the Chartered Bank but had severe doubts about top executives from the Chartered Bank mein office in London, Jay said that when dealing with communists one must never "kov toy" and that it was absurd for the Chartered Bank to crawl to the Chinese when the Chinese vere so obviously in the wrong. Jay saw no objection, of course, to there being improved relations between the Chinese and the Chartered Bank but the aim of the Chartered Bank should be to put across to the Chinese that they were not very pleased at having one of their employees detained without reason or without trial: that they hoped this man would be released soon and that, more important, there should be no repetition of such a case. should be no question of the Chartered Bank thanking the Chinese for releasing Johnston. Having said all this, Jay then went on to say that he would not be surprised to find Johnston

SECRET /contd...

There

SECRET

released within the next week or so.

(4) Jay said that Peking had expressed concern about the large number of resignations from the Bank of China in Hong Kong: many of these resignations had been of quite senior employees who had served the Bank faithfully and well for many years, Jay vas asked to investigate and comment on this but he was reluctant to do so in case of impairing his relationship with LI. Peking had also expressed concern at the recent employment of a number of young school leavers they wondered whether it would be in the best interests of the Bank to have such inexperienced and immature people in their employ. Jay felt that the concern here was that these school leavers vere from communist middle schools and might well be "over-indoctrinated".

24th October, 1969.

c.c.

Mr. J. Murray (F.C.0.) Mr. J.B. Denson (PEKING ) D.S.B. H.S.G. E.5.8.

ele

(J. Cater)

SECRET

SECRET 7

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Mr. K.C. Jay telephoned me on Tuesday, 11th November asking for an interview: he said that the matter was not urgent but that he would like to tell me of the difficulties facing him concerning "donations", Accordingly I made arrange- ments to see him the next day at 12.15 p.a.

Jay started the conversation by saying that he had recently been approached by local communists with a request that he make a donation of HK$10,000 to the Communist School Fund. Jay said that he had not been bothered by such requests over the past two years or so: the communists appreciated the delicate position in which he might find himself if they had approached him before for money but now that matters were "normal" they sav no problem in such an approach. The fund's target was HK$1 million, but such vere the tactics adopted by the fund raisers that Jay thought this target would be confortably exceeded. said that he had been rather pleased that his contribution had been set so low at HK$10,000: the Bank of China had been asked to donate only HK$50,000; apparently CHAN Hang of the Bank of China had suggested that Jay night make a donation of HK$30,000 but Jay had countered that it was important for the comparisons to be maintained and that if the Bank of China vere to pay HI$150,000 he would be quite pleased to increase his donation to HK$30,000. Jay said that the "bite" was being put on all communist organisations and those companies dealing

mainly or exclusively with China. He said that certainly people like E.C. VONG and Henry FOX would be making substantial donations but "unlike me, Henry FOX and others will be making their donations secretly and will not openly admit what they are doing".

Jay said

(15

Jay said that for many months Paking had been attempting to persuade the local communist hierarchy to suspend completely strike pay ("compensation"); it now seemed that at long last this instruction was going to be put into operation. that a certain amount of grumbling was expected and possibly a little loss of support but that för the first time in a long while the local communist leaders felt sufficiently strong to be able to take this sort of action against the "strikers".

Referring to the situation in China, Jay again commented how shocked he and local communists had been over the detention of Mrs. Martin and Mr. McBain in Shanghai. He said that be had now received a little more information concerning Mrs. Martin: that she was being held for questioning as her name had appeared in correspondence of one of the other Britons (unspecified) now detained in Chin. "It was Jay's firm opinion that Mrs. Kartin would not be detained long and that she would soon be released. He then went on to say that the wition of detained Britons in Shanghai had not been improved as a result of the difficulties arising consequent upon the decision of the Hongkong & Shanghai Bank to close its Shanghai branch. Jay said that he had now

/contd....

SECRET

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received information that Mr. Norman Bennett of the bank, in writing to Shanghai, had expressed surprise that the Shanghai authorities were placing obstacles in the way of the closure of the branch bank as this seemed to be in direct contravention of the vishes of Peking. Jay suggested that this sort of comment was not vise at the best of times but at the moment it vas particularly unwise as the relationship between Peking and Shanghai vas known to be strained.

At this juncture I took the opportunity of raising the question of the land belonging to the South China Iron Works. Referring to a previous discussion, I said that it had now become necessary for Government to write to Deacons (the solicitors) stating that Government was now willing to re-open negotiations with the crown lessees or their representatives but indicating that Government vas in doubt as to who at present represented the company: as it seemed that at least until now Johnson, Stokes & Haster had been representing the company, a copy of the letter to Deacons would be sent to Johnson, Stokes & Master. I suggested that in the circumstances it would be easier for all concerned if further action were taken through one of these rather more orthodox channels. At first Jay made no adverse comment and indeed implied that this was a proper and sensible move on the part of the H.K.G. Later, however, he expressed doubts as to whether this was the proper "and legal" thing to do:

in particular, he was concerned about the position of the Bank of China which held a mortgage on the property it was Jay's opinion that normally the mortgager should be informed of possible action such as this. I suggested to Jay that as this matter vas being handled by the H.K.G. in a normal manner, it must be assumed that "proper and legal" action would be taken: that in any event, as Johnson, Stokes & Master represented both the Bank of China and the S.C.I.V., presumably they would keep their principals informed: and that also I had to assume for myself that the Attorney General would know as to what was "proper and legal* in these circumstances than I. Jay took the point and eventually thanked me for giving him prior warning of Government action. He then went on to say that he very much doubted whether the 8.C.I.V. could bring together sufficient finance to pay off the Bank of China: that if this could be arranged then the Bank of China would be delighted for they would be getting back the full HK$11.28 million outstanding rather than the possible HK$8 million which the K.I.G. had indicated as the maximum they would offer for the land in question.

As requested by H.E. the Acting Governor a little while ago, I mentioned to Jay the Robertson's dinner party at which both H.E. and Jay had been present. I explained to Jay that H.E. had not expected to meet Jay on this occasion and thought it politic not to have a concentrated or detailed discussion with him: this, of course, had been done in the interests of Jay but H.E. was anxious that there should be no feeling whatsoever that he was trying to avoid Jay. Jay said

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- 3-

at once that he thoroughly understood the situation and that H.E. was entirely proper on this occasion. Jay informed me that recently he had received papers concerning the

registration of H.E.'s dogt that in the circulstances it would normally be necessary under the rules of the Kennel Club for two members of the Club comittee to inspect the dog. Jay wondered whether H.E. would expect any "special treatment" in this matter or whether there might be objection to Jay being a member of the two-man team of inspection. I said immediately that I was absolutely sure that H.E. would want no "special treatment" and that equally there would be no objection to Jay being a member of the inspection tean if this were the usual thing to do. Jay confirmed that this in fact would be in keeping with normal practice: that he, as Chairman of the Club, together with the Senior Veterinary Surgeon, Mr. Auchnie, would form the tea.

I informed Jay that I was going to Sydney for a few days from 17h to 22nd November : be asked that I should contact him some time on the 17th to see whether there was any "message" For me.

I have now contacted Jay: there is no message and I have promised to speak to him again soon after my arrival back in Hong Kong on Saturday, 22nd November.

(J. Cater)

17th November, 1969

c.c.

Mr. J. Murray (F.C.0.) Mr. J.B. Denson (PEKING) D.S.B. E.S.G. E.S.S.

SECRET

Mr. Murray

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Political Adviser

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Political Adviser

Mr. K.C. Jay telephoned during the morning of Saturday, 11th October asking whether I could see him "fairly urgently": accordingly I arranged to see him at 11.30 a.m. that day.

There seemed very little in the discussion with Jay which could be termed "fairly urgent": the main purpose in his asking to see me vas to clarify the questions I had posed over the proposed increase in the cost of "compensation" for sand obtained from China. It was Jay's opinion that instead of simply following up the question of price increase, the H.K.G. should take the opportunity of suggesting to the Chinese that they would like to appoint a new contractor in place of Mr. Henry FOL. explained to Jay that this was not an immediate problem: that the possibility of obtaining quotes from others might be considered at a later date; the immediate probles vas a check as to whether China Resources had indeed suggested to FOX that the price of sand would be increased in future from $1.50 to $2.00 per cubic yard. Jay said that from his discussion with LI Cho-chih there appeared little doubt that the proposal that there should be an increase came initially from FOK. He promised to make specific enquiries of China Resources within the next few days but again counselled that, no matter what answer was given by China Resources, the proper response to FOX would be that he should absorb the increase himself and that there would be no question of his being paid more money by the H.K.G. for sand delivered.

Talking of the situation in China, Jay said that every day that passed shoved CHOU En-lai to be stronger than ever. Because of this, Jay was convinced that there would be no serious trouble in Hong Kong as a result of action by local communists. There had been indications from the Prime Minister's office that CHOU was seriously concerned still about China's relations with Russia and,in particular, possible danger from the U.S.A. In the circumstances, CHOU was openly reported by his staff as wanting to improve relations with Britain, which he saw as being a useful source of support in the international scene. In spite of this, Jay strongly advised that, no matter what sight be said or done by CHOU in future, it was nevertheless important that the British Government should bear in mind that CHOU is a real communist and that, as such, in the very long term he cannot be regarded as "a friend". It was Jay's opinion that CHOU and the Chinese Govern- ment would increasingly show favour towards Britain and that it would not be long before CHOU was seen to be "stretching the hand of friendship" towards Britain. Asked what form this "friendship" might take, Jay suggested increased trade, release of Britons detained in China and friendlier relations between diplomats.

Other matters discussed:-

(1) Commenting on the October 1st celebrations, Jay said that one small instance of Peking's desire for better relations with Britain could be seen in the fact that they had been critical of two prominent communists who, at the celebrations in the Astor Theatre, became so enthusiastic in their shouting of MAO Thoughts

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that they included two chants against Britain and British imperialism. This criticism from Peking had taken the local communist hierarchy by surprise and they had claimed that they themselves had not been aware of this breach of instructions.

(2) Communist newspapers Beaming with pleasure, Jay said that he had been very pleased indeed to note the improved tone in the communist press in recent days: he had put this improve- ment down to the recommendation he had made to Peking on the subject a short while ago. I said that I personally had not been overly impressed by the *improverent" in the communist press which still remained objectionable: Jay was a little hurt by this and then amplified his remarks by saying that an improvement had in fact been made in the VEN VEI PAO, that be appreciated that the TA KUNG PAO had not made any great improvement but this could be ascribed specifically to the unpleasant Mr. FSI Yi-ming: that he was confident that FEI would soon be disciplined and that there would as a consequence be an improvement even in the TA KUNG PAO.

(3) Referring to Jay's mention of his report to Peking, I took the opportunity of asking how he had sent this report to the Chinese capital: Jay said that the message had gone by safe hand (i.e.

by a courier) to Canton, from whence it had been telegraphed to Peking. I asked whether this was the quickest or most efficient way of handling such a matter: Jay replied that it may not be the quickest but, as he wished that the contents of his communi- cation should not be seen by local Hong Kong commnists, it was in the circumstances the most secure method of communication. Jay then went on to say unprompted that it was his impression that if local communists vished to send a message urgently to Peking they did so directly by wireless: I asked whether be vas suggesting that wireless messages would be transmitted directly, say from the Bank of China, and he confirmed that this was what he intended to imply.

(4) Canton Autumn Trade Fair It was Jay's opinion that this Trade Fair would be "another failure": that it would be no better, and probably worse, than the previous Trade Fair. A recent decision had been taken that all contracts made at the Fair should be in J.M.P.: the authorities vere a little ungure as to whether this requirement could be enforced and so had issued instructions that every effort should be made to conclude at least 40 contracts on this basis.

(5) I informed Jay that I proposed visiting Macau for two days on the 253 and 20h October. Be made no response other than to nod his head and wish me a pleasant week-end" there.

(6) Jay said that as yet no reply had been received from Peking concerning the South China Iron Works land at Tsuen Wan: he expected, however, that Feking's views would be made known within a short time.

(7) Referring to a previous discussion concerning WONG Cho-fan and his visits to the YUE EVA School, Jay said that WONG had

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definitely been warned through local communist channels and that he (Jay) now felt that, provided sufficient official varning had been given to VONG, the X.,6. should be prepared to take quite firm action. Jay vas confident that there would be no serious adverse reaction from local communists if this stp were taken.

19th October, 1969.

(J. Cater)

C.C.

Mr. Murray (P.C.0.) Mr. Denson (PELING)

D.S.B. H.5.0. E.S.5.

SECRET

Mr. Murray or.

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Political Adviser

I arranged to see Mr. L.C. Jay at 4.30 p.m. on Thursday, 25th September.

Referring back to a previous discussion when I had mentioned the Universal Federation of Travel Agents' Associations Conference, I reiterated the B.K.G.'s position vis-a-vis this conference : that it had been privately organised and was by no means an official function. I also gave Jay brief details of the position concerning applications for visas in respect of East Europeans. Jay said that the position was thoroughly understood and that he was quite sure that there would be "no trouble": had explained the position both to local communists and to Peking some time ago but had received no adverse reaction.

Jay said that after some thought he had despatched his report to CHOU En-lai some days ago. He had commented at length on the present situation and suggested that it was now time for China to take positive steps to show that her intentions towards Bong Kong were friendly: in particular, Jay had mentioned:-

(a)

(b)

(c)

the advisability of releasing Anthony Grey before 3rd October when vong Chak is due for release.

It was Jay's advice that such a move would be favourably regarded by the rest of the world;

although there had been some improvement in the tone and content of the local communist press, nevertheless at times the communist newspapers were very critical of the H.I.G. and probably libellous: Jay felt that the H.I.G. was particularly sensitive on this score and would only be really convinced that China intended good relations if and when the newspapers behaved themselves properly. (In reporting this, Jay suggested to me that this in many ways was the most difficult recommendation for the Chinese to that he Chinese to accept but that he quite genuinely expected to see an improvement over a period of time.);

the problems and difficulties on the border:

Jay had strongly advised that early action should be taken by the military to ensure that there was no violation of British territory and that nuisance activities such as the Firing of firework rockets should be stopped.

Throughout the interview Jay vas in a very confident mood: this may have been partly due to his obvious pleasure in having been asked to provide a special report on the local situation for Prime Minister CHOU En-lai. Jay read into this request a further indication that CHOU was in the ascendency once again in Peking. At the time of the 9th Party Congress CHOU had been criticized for bothering about such a small matter as Hong Kong: the fact that CHOU was now specifically asking for advice on future policy in Hong Kong indicated to Jay that CHOU felt strong enough to be able to ignore would-be critics in Peking. According to Jay, correspondence

/contd.

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ترانه تريحه

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from the Prime Minister's office tended to show that CHOU was strongly supported now by the military and that, as reported before, LIN Piao vas continuing to curry favour with CHOU.

Jay said that, whilst it was true that KAO had been unwell for sone time, he did not believe that MAO was dying or even seriously ill.

Jay expressed serious concern at the present situation in China. If the situation in Peking were not quickly resolved he felt that in particular there would be trouble in South China: already reports had been received of the serious situation in Iwangsi and there seemed little doubt that the position in Iwang- tung was deteriorating. Jay expressed the hope that the H.K.G. vas prepared to meet the consequences of the internal strife in Ivangtung and wangsi which he felt on present indications to be almost certainly worsening. According to Jay, there were still

large number of Tao Chu supporters in important positions in the region and in communist circles there had been much discussion and speculation that these people vere preparing for the overthrow of the present leadership in South China.

As for Hong Kong, Jay was firmly of the opinion that the H.K.G, was in a very strong position "In your overall policy you can now afford to be quite firm very Firm". With the deterioration in the situation in China and the full appreciation that Hong Kong is considered to be of great value to China, it was Jay's opinion that local Hong Kong communists would be very hesitant before causing trouble. Jay came back to this "quite firm - very firm" theme on several occasions during the discussion: towards the end he did suggest, however, that if possibilities occurred in which the H.I.G. could show some friendship or desire to improve relationships, then this might be considered, but only in the context of the overall fire policy. Jay said that be had been very pleased indeed to see the newspaper report in which it was alleged that Mr. Anthony Crosland and others had refused an invitation from the Chinese Charge d'Affaires in London to attend the 1st October celebrations: Jay thought that this refusal would have shown the Chinese that the British were not over-anxious to be friendly and would probably encourage the Chinese to believe that something more positive had to be done before Britain would publicly accept the hand of friendship.

Other matters discussed were:--

(1) South China Iron Works: Jay said that be expected a reply from Paxing in the near future. Meantime, LI Cho-chih had again complained about the low offer made by the H.K.G. but Jay allegedly had told LI that the H.K.G. was obviously doing China a favour and that if LI and others did not recognise this, the simple answer vas to reject the offer and attempt to sell the land themselves.

(2) Sand: Jay said that be had not yet had the opportunity of discussing this matter with China Resources but he had discussed it at length with Li Cho-chih. Apparently LI had indicated that

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he was aware that there had been a proposal for an increase in the cost of "compensation", but he was quite sure that the proposal had come from Henry FOK himself. Indeed, on hearing

the proposal, LI had not bothered to find out from whom the increased cost would be obtained he had assumed that in view of the very substantial profits made by FOX, the increased "compensation" would come from him, On reflection, LI had become quite concerned about the proposal and suggested that it was not in keeping with previous policy; he gave as example the proposal that there should be an increase in the price of water to the H.I.G. (please see my last report). According to Jay, LI had then corrented that it seemed a pity that the H.K.3. had originally insisted on using Henry FOK's services. Jay enquired whether there would be any objection in the future if others were asked to tender in addition to FOK: LI said that there was certainly no objection to this but when Jay suggested thațhe would pass this advice on to se, LI allegedly said that this might not be advisable: that it might even be a "threat"to my future career as "clearly those in authority wanted Fox to

POK continue as the sand contractor". I informed Jay that this was utter nonsense: that I had been asked to make enquiries about the proposed increase in the cost of sand and that in any event the consideration and award of tenders such as this was done on a completely impartial and honest basis.

26 September, 1969.

Elo

(J. Cater)

c.c.

J. Murray, Esq. (F.C.0.) J.B. Denson, Esq. (PEKING) D.S.B.

H.S.G. 1.5.6.

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28 GET 1969

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Political Adviser

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TSX 4/68 II

Oct.

Political Adviser

SECRET

Lor

Mr. K.C. Jay telephoned on the morning of Monday, 29th September asking whether he could see se "quite urgently": accordingly I made arrangements to see him at 3.30 p.m. that afternoon.

Jay started the discussion by saying that he had just received some "very good news" from Peking concerning future attitudes and policy towards Hong Kong. He said that his instructions from the Chinese concerning the passing of informa tion to me were to the effect that he would be receiving three different types of information: the first group included information/requests which should be passed on specifically to me; the second was information on which he could use his discretion as to how much was told me; and the third vas information that ranged from Highly Confidential to Top Secret and concerning which he would have strict instructions not to mention to me in any circumstances. Jay apparently thought it necessary on this occasion to emphasise his own working rules so that I may understand that normally be "so trusted" me that he was prepared to provide information which came within the third category. The discussion that afternoon was apparently to include what Jay termed as "Top Top Secret"i I tried to appear suitably impressed.

Jay said that very recently instructions from Peking laid down specifically and more definitely than for many years the line which local communists vere to take, not only for the period of the 1st October celebrations but also afterwards and until further notice. Peking's instructions vere simply to the effect that in no circumstances were local Hong Kong communists to cause trouble in Hong Kong: that during the 201 Anniversary celebrations, if anybody were to cause them trouble difficulties, the communists vere "not to fight back" - if, say, they had trouble from Nationalists, then the correct thing to do would be to report the incident to the Police: if the Police caused the communists trouble, then the communists would have to "back down". It was fully appreciated by Peking that it might prove extremely difficult to explain this new attitude towards affairs in Hong Kong and so it was suggested that by way of explanation to local communists they should be told that Peking had definite information that the H.I.G. at this stage would be trying to "trick" the communists into causing trouble by "fighting back" so that they might have an excuse for taking strong action against all communist activities: in these circumstances, local communists were to be told that Peking had decided that for reasons which they could not state at the present time it was better for China that there should be no trouble and therefore no excuse for the H.K.G. to harrass the Hong Kong communists.

As regards propaganda on 1st October and later, Peking's instructions were that there should be no reference to "paper tigers", "white pigs" or "yellow dogs": also that supporters should be encouraged not to shout those MAO slogans which dealt with "wishes" rather than "facts". This last

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instruction had apparently caused some concern in local communist circles as, not unreasonably, they found it difficult to understand: attempts were being made to clarify the intentions with Peking but meanwhile local communist leadership had made the assumption that this instruction meant that they should go slow on slogans which expressed the wish or hope that the Chairman might live a thousand years, etc. etc.

Referring to the 1st October celebrations, Jay said that he was hoping that Mr. Saunders of the Hongkong & Shanghai Bank would soon contact him as Jay proposed advising Saunders not to attend the Bank of China cocktail party on Septembe 30th: Jay thought this necessary as Saunders and the H.K.G. might be compromised as Saunders was a member of Executive Council in addition to being Chairman of the H.K. & S. Bank. Jay was pleased that Graham of the Chartered Bank had accepted the invitation to the Bank of China cocktail party but was less pleased with the way in which Martin Curran of the H.K. & S. Bank had accepted his invitation to the cocktail party: apparently, and according to CHAN Hung, Curran had telephoned CHAN to accept the invitation and had then gone on to say how delighted he was to be attending such an important function celebrating the tremendous achievements of China during the past 20 years

why, complained Jay, could he not simply have got his secretary to telephone the acceptance?

Other matters discussed: -

(1) Jay said that local communists, and in particular those who had had a spell of imprisonment in Stanley, were now openly boasting that they had forced the H.K.G. to effect certain improvements "for the people of Hong Kong": for example, in Stanley Prison the communists had no doubts that they had been instrumental in forcing the authorities to provide improved meals, including an extra "prison tea" and also better clothing. In addition, because of agitation locally, Hong Kong authorities vere taking a firm line and refusing entry into Hong Kong of those people unacceptable to China. Jay mentioned in this context an opera group from Taiwan and said that if indeed a group such as this had been refused entry it would be a pity: that in his opinion the H.I.G. should welcome visits from any Far Eastern people and in the case of Taivan, provided visitors did not purport to represent "China" or "The Republic of China", they should be welcomed.

(2) Jay said that local communists were pleased with the results so far achieved to win hawkers over to their way of thinking: in particular, some success had been achieved in making small loans to havkers and in encouraging them to take out "Insurance" with communist organisations.

(3) Referring back to his report to Peking, Jay said that he had commented at length on the more important members of the communist hierarchy in Hong Kong: that on the whole he had

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DEL

taken the line that the leadership here vas acting sensibly and could be trusted to carry out Peking's instructions faithfully: he "even gave a satisfactory report on LEUNG Vai-lam" - the only exception was Jay's old enemy, FEI Yi- ming. Jay then spent some time going over all of PBI's bad points and told me that he had exphasised them in his report: he then suggested that if one had a real target such as FEI, the best way to deal with him would be to praise everybody else but to write down FEI,

(4) Jay said that recently there had been a great deal of talk in communist banking circles, trying to pinpoint those who vere really responsible for the 1967 debacle: the people now being mentioned in connection with this were LAI Ying-chun of the Ivangtung Provincial Bank, YING Kwong-yick of the Bank of Communications and TSUI Li-fun of the Bank of China. The last mentioned was said to have particularly strong influence with the motor workers' unions.

(5) As requested, I mentioned to Jay that WONG Cho-fan vas visiting the Yue Hwa school far more frequently than previously agreed: the understanding was that he should have permission to visit the school once & quarter or more frequently if he had special permission from the Director of Education. In spite of this it was known that already in September VONG had visited the school at least on five occasions. Jay said that he would certainly have VONG Cho-fan warned about this, but strongly recommended that the H.I.G. should now on its own part issue a firm warning to WONG.

(6) Jay reported that POON of the Bank of China had recently returned from the Mainland: POON was looking very sunburnt and much slimmer and Jay, with a great deal of pleasure, said that obviously POON had "volunteered" to work on a farm. Whilst in China, POOM apparently visited Peking where allegedly he was told in quite firm terns that Peking was far from satisfied with the manner in which Hong Kong communists had acted in 1967 and that it was expected in future they would behave themselves and be better disciplined.

又

(J. Cater)

3rd October, 1969.

c.c.

Mr. J. Murray (F.C.0.) Mr. J.B. Denson (PEKING)

D.8.B.

H.S.G.

I.8.8.

SECRET

Mr. Murray

155

307

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With the Compliments of the

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22/9/69 A Aqua

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Political Adviser

I arranged to see Mr. K.C. Jay at 4.15 Tuesday, 16th September,

- 3 OCT 1969

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3/22/2

As requested by Mr. Haddon-Cave, I mentioned to Jay the correspondence recently exchanged between Government and Mr. Henry FOK concerning the supply of sand to Hong Kong. I informed Jay that Fok had recently reported that China Resources had verbally stated that in future the "compensation" for sand would be increased from $1.50 to $2.0 per cubic foot. I told Jay that past experience had certainly taught me to be very cautious when dealing with Mr. Fok and accordingly it seemed vise to check whether indeed China Resources had decided definitely that there would be an increase in the cost of sand to the H.I.G. Jay commented that it was very wise indeed always to be careful when dealing with Fok as he was a man with a very unsavoury past and was known even now for his shady deals. Jay continued at some length giving considerable detail of the way in which Fok had tricked the N.K.G. into believing that he was the only person with whom the Chinese would be prepared to deal on this matter of the sand. Jay said that Mr. Y.K. KAN had great suspicion of Fok and at the time had nade enquiries of Jay as to the true position: Jay had reported the situation back to Mr. Kan but apparently Mr. Kan had been unable to persuade "the authorities" not to deal with Fok. Jay said that the local communists had found the situation extra- ordinary and difficult to understand, but in the circumstances, and typically, had decided that if the H.K.G. were foolish enough to insist on dealing with Fok then they would take full advantage of him hence pressure had been brought on Fok to do certain things such as the taking of a Hong Kong football team to Canton and, rather more seriously, putting pressure on him to give financial support to the communists in 1967 to the extent of HK$1 million. Jay thought that the communists would go on taking advantage of this situation just so long as Pok remained the contractor for the Sand Monopoly. It was Jay's opinion that when next the H.I.G. considered the renewal of Fōk's agreement, they should invite others to tender: he had no doubt that there were several other companies who would prove acceptable to the Chinese. Reverting to the question of the increase in the price of sand, Jay expressed doubt as to whether this proposition had been put to Fok by China Resources: Jay said that a short time ago the suggestion had been made at a fairly low level that Canton should increase the price of vater supplied to Hong Kong but that this proposal had been turned down. According to Jay, the Chinese are very anxious indeed about their supply of foreign exchange - "you must remember that, although you may be anxious about the supply of water or sand, they are even more anxious to obtain Hong Kong dollars from you". It was Jay's opinion that if there had been any mention at all of a price increase it would most certainly have been mentioned first by Fok himself and at a very low level:

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I enquired as to why Fok should do this and Jay suggested that obviously he was either intending to split the increase with China Resources or to obtain further income for the Chinese with the intention of currying favour. Jay promised to make enquiries about this but said that undoubtedly, no matter what the position, he would strongly advise that the H.K.G. should not meekly accept the increase but say to Fok that if there were to be an increase then he should absorb it as part of the cost of his own operations.

South China Iron Works Land: I enquired as to the present position on this matter. anay

Mấy said he expected to be bearing fairly soon from Peking: the impression he had gained vas that Peking was quite pleased with the offer made by the H.K.G. this in spite of an attempt by LI Cho-chih to

influence Peking against the proposal. Jay had been given sight of LI's telegram to Peking in which details had been given of the proposition: Jay had thought it most misleading for example, LI had said that the H.I.G, vere offering $15 - $16 per sq.ft. for land which the H.K.G, would probably sell for three or four times that amount: at Jay's insistence LI had sent a second telegram giving the exact details passed to him by Jay and just to make sue of the situation Jay had again sent a copy of the proposal to Peking direct.

Other matters discussed :-

(1) Jay reported that he had recently gone to the North Vietnamese offices in the Bank of China to pay respects after the death of President Ho Chi Mini he had been surprised and disgusted at the amount of Chinese propaganda in the corridors leading to the North Vietnamese offices. Later he had mentioned this to LI Cho-chih and suggested that such blatant publicity might have adverse affect on foreigners visiting the Bank of China: LI had replied that such a possibility had been considered but it had been decided to proceed in any event - that there could be no criticism From China of this tremendous display of Chairman MÃO's Thoughts.

(2) Jay said that he had been a little surprised that recently at the North Vietnamese 1st September celebrations II Pung had gone out of his way to be pleasant to Jay and to ask whether from time to time he could see Jay with a view to obtaining advice on matters generally. Jay did not think that this vas simply a matter of courtesy on the part of Kei "he is not that sort of man" but thought that Kai was probably working to instructions.

(3) According to Jay, LI Cho-chih is becoming less and less popular with Peking: Jay believes that it is now unlikely that LI will be promoted to the senior post in the Ministry of Foreign Trade as was reported some time ago.

(4) Jay said that a few days previously LI had spoken to him with a view to Jay raising several points of complaint with the

SECRET

/contd...

B.I.G.

SECRET

Jay claimed that directly LI started off on his list of complaints (concerning the licensing of teachers, the arrest of NG Yee, etc. etc.) Jay had said that he was not prepared to pass this message on to me until such time as he could see from the actions of local communists and messages from Peking that there was "a real revival of desire" on the part of the Chinese to improve matters. Jay said that LI had been rather surprised at this rather tough line which he had adopted, but what LI did not appreciate at that moment was that he (Jay) had recently been asked by Peking to report fully on the present situation in Hong Kong, together with recommendations as to how relation- ships could be improved: Jay took this to be a sign of confidence in his own position and an indication that Peking was not entirely satisfied with the way in which local Hong Kong communists were progressing. Jay said that he had yet to prepare his full report for Peking but that when he had given further thought to the matter he would like a further discussion with me.

Talking generally of Sino/Soviet relations, Jay saw in the visit of the Russian Premier to Paking an indication that CHOU En-lai and his noderate group være beginning to gain ascendency: he did not think it possible that Losygin would have been permitted in Peking if the more nilitant group of CHIANG Ching and KANG Sheng had complete pover. Jay said that he had not heard any further information concerning the visit of CHOU to Canton but assumed that it was still intended that the Prime Minister should visit the Southern capital soon.

I mentioned to Jay the continuing problems being experienced on the border and in particular the seriousness of the incursions into British territory of Chinese vessels. Jay expressed some surprise that this was still a problem as the last time he had mentioned it to local communists they had appeared to take the matter seriously - sufficiently so to report it to Peking. Jay said that certainly it had been his impression that there had been a period of quiet after he had last forwarded a complaint. He undertook to raise the matter again, and in particular to mention it in his "full report" to Peking as being a matter which could have serious consequences.

Jay said that as of that date he did not believe that the communists had been given firm instructions as to the way in which the 1st October anniversary should be celebrated. Locally it had been assumed that instructions would be similar to those of last year and they were acting accordingly.

طن

20th September, 1969

c.c. Mr. Murray (P.C.O.

Mr. Denson (Peking)

D.5.1. H.S.G.

E.3.$.

(J. Cater)

SECRET

Mr. Murray

RE: E!V ́ ́D IN

REGILTHYN

24 SEP

WAR Mod is the

the Compliments of the

FEM 33. Political Aliudqr

31/3/

1/9/69

Hong rộng

равера

19 Mor Wilfad

Cam

Mr Wilson

Sef

TSX 4/6819/1

SECRET

Political Adviser

Mr. K.C. Jay telephoned me during the morning of Thursday, 28th August asking whether I could see him fairly urgently: accordingly I arranged to see him at 2.30 p.m. that afternoon.

Jay started the conversation by expressing concern over the wages dispute at the Fairwear Knitting Factory in San Po Kong. Be had been aware for a day or two that the communists proposed making political capital out of the dispute but only that morning (Thursday) he had learned that two men from the Bank of Chiňa, who had been mainly responsible for organising the workers at the Artificial Flower Factory in San Po Kong in 1967, had been sent to help organise the workers at Fairwear Knitting (Jay promised to give me the names of these two men within the next day or so). Jay then asked whether the Chartered Bank had been approached with a view to having then drop their claim against the factory's assets "after all, $60,000 is such a small sum of money". He proposed that, if Government found it embarrassing to speak to the Chartered Bank in these teras, he personally would be pleased to speak to Mr. David Millar, the acting Manager of the bank. Jay then expressed the view that if Mr. Peter Grahan, the substantive Hanager, had been present in Hong Kong, the Chartered Bank would not be pressing the matter so firmly. I suggested that perhaps Hillar found himself in a difficult position and probably there vere other creditors involved in the action so that it would need rather nore than a withdrawal on the part of the Chartered Bank: Jay said that his information was that the Chartered Bank vere the main creditors and that if necessary he was prepared to "tell them" to hold back. I queried this expression and Jay further explained himself by saying that the Chartered Bank did a great deal of exchange business through him with the Bank of China. I said that I would pass his views and proposal on to the H.I.G.

Jay then said that he had something of the "utmost secrecy" to put to me. Some years ago, when he was still with the Bank of China, Peking had decided that the Bank of China should not show any interest in "branching" in Hong Kong this decision had been made on Jay's advice and had been the policy of the bank ever since. Recently the Bank of China had suggested to Peking that it would be in their interests if the bank were able to open branches in Hong Kong. Peking, according to Jay, had replied to the effect that their previous policy decision must stand: and yet, said Jay, his contacts in the Bank of China had only that day informed him of the bank's intention to open a

service branch" in the ground floor of TAK SHUEN HONG in the Western district. Jay claims that he had inmediately spoken to bank officials reminding them of Peking's views on this matter but had been told that the office in western district was not a "branch" in the normal, accepted sense. Jay seemed quite agitated by this and said that he was in the process of reporting it to Peking. The need for "atmost secrecy" was that he feared that any leak on our part could at once be traced back to him as the decision to open the "service branch" vas known to very few people. He had already suggested to the Bank of China

GS FT

/contd...

SECRET

official that if the bank proposed proceeding with their plan, then the sooner other communist banks in Hong Kong vere töld of the position the better: Jay thought that this would be vise of the bank in any event but of course at the same time it would mean that people other than himself outside of the Bank of China vere aware of the plans.

I took the opportunity of saying to Jay that there vere two itens which I should like to discuss with him:-

(1)

(11)

Pig Laans: I passed to Jay the information you had given me that morning concerning the background to this katter: he noted the position and said that he would take an early opportunity of informing LI Cho-chih that in his opinion the Urban Services Department action was quite reasonable and that certainly laans would be well advised either to pay the required deposit or give a banker's guarantee.

As requested, I informed Jay that the Police would appreciate rather more co-operation from the management of the YIEN YIEH and KINCHENG Banks - not that the management had been unco-operative but the Police would be grateful for more direct contact with bank employees vhen enquiries were being made. I said that the Police were putting a very big effort into the enquiries and that I was aware that a squad of some 20 officers vas being employed full time on this. Jay said that he had picked up some rather interesting information on the robbery: he had received a message from Peking to the effect that they strongly suspected that the KINCHENG Bank robbery was "an inside job" apparently not necessarily an employee of the bank itself but somebody from communist banking circles. In the circumstances, Peking thought it would be highly embarrassing if local communists were to continue to criticise the Hong Kong Police for lack of action only for it later to be revealed that the person responsible vas a member of the communist banking fraternity. Jay said that he expected a similar message would be passed to LI Cho- chih within the next day or two.

As a follow up to the discussion of Police action and communist banks, Jay said that in a recent conversation with POON Ching-hon (Deputy Superintendent of the Bank of China) he had been told that the campaign to win over some of the Police was "hotting up". I asked him what precisely be meant by this and he replied that the campaign with the Police was virtually a permanent one: that the communists were constantly probing, trying to find weakness and attempting to win over the Police to their point of viev. I was a little sceptical about this and goaded Jay a little by saying that I thought this surely must be utter nonsense: he replied rather heatedly that it was far from nonsense and that already there were signs that the communists were being successful. He said that, for example, with the announcement of the anti- corruption bill, the communists had been in touch with many Police

/contd....

EORET

officers

SECRET

and suggested to then that, if they were to switch their bank accounts and deposits to communist banks, the banks would guarantee complete security. I asked how this could be done and Jay replied that firstly the banks vere confident that the Police would not force their way into the banks demanding to see books, and secondly that the Police accounts would be kept in "safe accounts", which apparently is something similar to the Swiss numbered accounts system. Jay said that the communists had already had some success in this move and that they were now considering tempting members of the Police still further with the offer of very low interest loans.

ne.

Referring back to discussions over the past few weeks, I reminded Jay that on several occasions he had spoken rather mysteriously about "big news" from Peking which would surprise

I asked whether he had any further information on this. Jay said that he had but was reluctant to say anything because as yet there was no firm information or evidence and he had no wish to mislead me. After further pressure he said that the "stirring events" be had mentioned previously were to do with a change of leadership. I said that I found it very difficult to believe that Chairman MAO could be deposed: Jay looked blankly at me for a while and then said that of course there could be no question of the Chairman being deposed: that whilst he lived MAO would be Chairman - what he was referring to was the "real leadership" of the Chinese Government. I enquired as to who were the main contenders: Jay said that there were several groups with differing points of view and not just purists and revisionists: that the military were now taking à very active part in the discussions and had been expressing very serious concern over the state of the country. I asked whether CHOU En- lai and LIN Biao were the main actors on the stage at the moment: Jay said of course CHOU was always important but LIN Piao vas little more than "a cypher" "only one of four Field Generals, and not the most important of those". Jay said that senior people dealing with economics, trade and industry were virtually "on strike" "sitting on their hands" and demanding that positive decisions be taken on the future of China which would enable them to proceed with economic planning. Jay said that increasingly the views expressed from Paking were to the effect that matters could not continue as they vere: that decisions had to be made soon which would enable proper direction to be given to the Chinese economy. I asked how such change in leadership could show itself, particularly bearing in mind his comment that MAO's position as Chairman was unassailable: that Madam CHIANG Ching was MAO's wife and it was important at this stage presumably for China to show a solid front to the outside world, jay said that in his opinion indications that the struggle had been resolved would be the announcement of appointments to certain key posts: later, if, say, the moderates, or as he preferred to think of then "the realists" were successful, we should find that the more militant leaders like Madan CHIAHG Ching and KANG Sheng would be demoted in the hierarchy.

باتات

(J. Cater)

30h August, 1969.

c.c.

Mr. Marray (London)

D.S.B.

Mr. Denson (Peking)

H.S.G.

$.5.5.

SECRET

(Mimalay

Finante and Unt femer)

Mr. #17 ford

SECRET

Reference

FEHA 3/30/2

We know very little about Chen Yi's activities at present. The Rumanian, Erbassy in Peking was advised to address its Invitations to Chen Yi as Minister of Foreign Affairs so we assume that he is still the titular holder of the office. Li Heen-Nien has been attending functions in the

He position of Minister of Foreign Affairs. headed the Chinese delegation to Ho's funeral in Hanoi.

Chen Yi's last recorded appearance was on 19 May when he was described as Vice Chairman of the Military Affairs Committee, a post which he held before the Cultural Revolution but which we thought was largely honorific. During the Cultural Revolution Chen Yi was reported as saying that he would like to leave the Ministry of Foreign Affairs and pick up his military career again.

3. Jay'a remark that Lin Piao is having trouble with Chen Yi may not therefore be as odd as it sounds if he is indeed playing an active role in the Military Affairs Committee. Presumably he would represent the point of view of the "pragmatists" with which he has been associated in the past and could well be used by Chou En-lai as his link-man in relations with senior military officers. This would be consistent with the pattem which seems to be emerging in China at the moment of an alliance between Chou En-lai and senior military officers in the Central Committee as reflected in the tough line the army are taking with dissidents in order to impose law and order and the prominent role which Chou and his supporters appear to have played in the talks with Kosygin in Peking on 11 September. A good deal of what Jay says on the general struggle for power in Peking would seem to me to be speculative but his sources would seem to endorse the trend I have mentioned above.

Jazy

(C. Wilson)

Far Eastern Department

18 September 1969

Thank

you.

Mr.

6-23/9

18%

Mr. Murray

6/9/69

see morgnid

не

2x 16 Safe.

Mily Welford

176 144 18/9

د)

the Cantat

With the Compliments of the

Political Adviser

Đảng ông

- 19/0

1919

ра вигора

TSX 4/68

SECRET

Political Adviser

I arranged to see Mr. K.C. Jay at 3 p.m. on Monday, 1st September, partly to seek latest advice on the question of pig laans and partly to pass on comments made by H.E. in respect of the Fairwear Knitting Factory vage dispute.

2. (a) Pig Laans: Jay said that he had now discussed this matter further with LI Cho-chih and a representative from China Resources and that he was now quite confident - although of course he could not be absolutely sure that there would be no serious trouble if Government were either to insist on payment of the deposit or alternatively to require a banker's guarantee from the laans. Apparently LI had insisted that, as yet, this matter had not been raised with him by local communists and that therefore he could not regard it as being a "serious matter": Jay had apparently suggested to LI that the H.K.G. proposals vere reasonable and accordingly LI had accepted this assessment without serious query. The China Resources representative had tended to say that this was entirely a matter for NG FỪNG HONG and the laans to decide, but finally and grudgingly accepted Jay's view that they, China Resources, had a real interest in ensuring that there was no breakdown in the continued flow of supplies to Hong Kong.

(b) Fairwear Knitting Factory: There was no need for me specifically to bring this matter up as Jay, amidst the usual flurry of subject matter at the beginning of the discussion,jave me the names of the two Bank of China employees involved in the organisation of the Fairwear factory workers (please see my previous report). In discussing the dispute in general terns, I made the point to Jay that it seered to us in the H.K.G., and to many others who have followed the dispute as reported in the newspapers, that the communists were scarcely acting in the interests of the workers by encouraging them not to accept offers of legal aid: in the long run it seemed certain that the workers would also appreciate this and feel that they had been misled by the communists. Jay replied that if I really believed that the communists, and particularly the two organisers, would be interested So anything other than stirring up trouble for the authorities "then you are far too nice a person". Jay said that the communists certainly would not care that in the long run the workers would regret taking advice from the communists, but so far as the communists were concerned they would have achieved their objective if they had persuaded the workers to become anti- authority even if only for a short while.

Jay then treated me to another long discourse on the situation in China. It is clear from the frequency with which he talks on this subject, and the serious manner that he adopts, that he is very concerned indeed. Jay said once again that the situation in China vas "really bad":" in terms of lack of decisiveness and determination to provide much-needed leadership, the situation was probably worse than at any time during the last 20 years. The situation was very fluid and tending to change almost from day to day. Information received from Peking

/contd.

SECRET

I find this hard

be believe. Is there Crory other criteria

Har Cham Yo te shit 1- the act?

Which the

Americans will the v. careful to

avoid

over the week-end cast doubts even on his recent assessment that no matter who won the power struggle, MAO would remain Chairman. Jay remains, of course, an admirer of Prime Minister CHOU En-lai and it is his belief that CHOU and his supporters will triumph: he further believes that if this were the case then CHOU and his supporters would retain MAO as a figurehead so as to preserve the illusion of solidarity in Peking. Jay said that, on the other hand, the various military groups were beginning to emerge as a single entity and many of the military were reportedly in favour of deposing MAO. I queried Jay at some length on this, reminding him that it was not his view only a few days before: be countered this by saying that he was merely reporting what had been suggested to him and that the latest information from Peking certainly did indicate this emergence of the "military group", Part of the military thinking was, according to Jay, that recent history had shown that, when effecting a change, unless the top leadership vere seen to be ousted they could be used as a rallying point at a later date: in this instance they were referring to LIU Shao-ch'i. Jay confirmed once again what he had said about LIN Piao: that he was no more than a "lightweight" in this equation and that in CH'EN Yi he was finding an increasingly difficult opponent. Jay said that the Naoists, meanwhile - i.e. the hardliners represented by Hadam CHIANG Ching, KANG Sheng, etc. were not by any means giving up the struggle: indeed, to his personal knowledge five out of seven People's Representatives vhon he knew personally in Kwangtung had recently been sent on a "re-education" or "rectification" course, probably with the intention of swinging them to the more extreme Haoist point of view. He thought that this sort of re-education was occurring elsewhere in China with a view to influencing the People's Representatives before attempting to call a meeting of the People's Congress.

In commenting

on the Russian/Chinese border problems, Jay gave it as his personal view that, in view of the opposition now building up against the Maoists in Peking, "America could save MAO America is his only chance". Asked for further explanation, Jay said that if it were seen by Peking that the United States were putting support behind the Russians, then this could well have the effect of rallying the various dissident groups in Peking behind MAO,

4 September, 1969

C.C.

Mr. Murray (P.C.O.

Hr. Denson

PEKING

D.8.B.

1.8.0.

E...S.

св

(J. Cater)

Mr. Murray

岖

349

अ

fusti-2/4

No Contin Mr Jay D.R.q

With the Compliments REIVED IN

ભાવ

RˇG! ́TRYN TO

Political Adviser-5 SEP 1969

Hong Kong

26/8

FEH 31

TSX 4/68

MG.

4/9

Political Adviser

SECRET

I contacted Mr. K.C. Jay on the morning of Saturday, 16th August in order to discuss further with him various points:-

(1) Canadian immigration papers I informed Jay that clearly there had been no delay whatsoever in the handling of his papers by Special Branch: that 8.8. had dealt with the matter within some three days and it was now back in the hands of the Canadian authorities. Jay appeared pleased to learn this information but gave no indication whatever that he had received the information about the delay from the Canadians or any idea as to when final approval would be received.

(2) Payment of deposits at Government Abattoir - I asked Jay whether he had any further information on this subject or any advice to give. Jay said that he had not had an opportunity of raising the matter again with China Resources but would certainly make a point of doing so within the next few days. He said that the impression he had gained before was that they had tended to treat the matter rather lightheartedly but he hoped that what he had said on that occasion would have given them food for thought and that they would be a little more responsible next time he met them. He repeated that, in view of the shortage of pig supplies in China, it would not upset the Chinese, and particularly the local communists, if, as a result of a confrontation on the issue of deposits, there were a temporary stoppage in supplies of pigs to Bong Kong. I asked whether any such move would in fact only be a temporary one and Jay replied quite heatedly that obviously it would only be a temporary stoppage as in the long run China would wish to maximize her foreign exchange earnings in Hong Kong and that in any event if it came to a stoppage and was seen by Paking as being the result of local communist action in Hong Kong, there would certainly be criticisa by Peking. Jay said that recent information from South China indicated that the Chinese authorities were becoming increasingly concerned about the food supply situation and that many communes had now reversed earlier decisions and were actively encouraging peasants to start their own private vegetable plots and to raise pigs and poultry.

(3)

South China Iron Works I enquired of Jay the present position: he said that he had reported the matter to Peking and had received a reply to the effect that, whilst the amount ($HK.7} m.) proposed was not as large as hoped for, nevertheless it was an encouraging sign that the H.I.G. was prepared to consider their problems in this way. Jay said that he had yet to speak to LI Cho-chih, through whom the formal negotiations would have to take place: he had not yet spoken to LI partly because LI had only returned to Hong Kong from a visit to Canton and Peking the previous week-end and partly for tactical reasons. Jay explained these tactics as being simply that, now it was known in Peking that an offer had been made by the H.K.G., the Bank of China Headquarters there would seen be putting pressure on LI to report the position: this would mean that LI would be forced to go to Jay to enquire about the situation, and Jay thought that this would put him in a rather stronger position from a bargaining point of view than if he contacted LI direct, perhaps giving the impression that he was responding to the pressure of two weeks ago.

SECRET

/contd.

SECRET

Jay then proceeded to comment at great length on the local situation. Speaking of local communist tactics for the future, he repeated that he knew for certain two things:-

(1)

there would be no serious, major trouble in Hong Kong along the lines, say, of the 1967 disturbances; but

(2) there would definitely be a campaign of "minor

confrontations".

I suggested that if the communists were to proceed with this "pin-prick campaign" they might well be inviting a similar campaign in counter-action by the H.K.G. Jay said that he had been giving very serious thought to this question of counter- action and believed that there were three "broad possibilities:-

(a)

(b)

(c)

The H.K.G. could take very tough anti-communist action: he felt that the H,I,G, could probably get away with such firm measures and without inviting serious reaction from China in the very short term but that in the long term such militant action could only be to the detriment not only of China and Chinese communism but also of Hong Kong. He also suggested that it would not be "British" to take such action.

At the other end of the scale, the H.I.G. could consider holding out the hand of friendship and attempting to be as friendly and helpful as possible. Jay felt that, if anything, this would be a worse solution than (a) as any policy of this type would be misconstrued imediately as being veakness and could only lead to further demands which undoubtedly the H.K.G. sooner or later would have to refuse.

Jay felt that the only policy he could advocate was the one he had advocated so often before a compromise between (a) and (b), i.e. at all times the H.K.G. must be firm, particularly where matters of law and order are concerned : "even if you wish to be friendly, do not give anything unless they give something first" I suggested, as I had done several times before, that there was really nothing to negotiate, nothing to give: Jay replied that in these circumstances we should not try to give anything and equally we should not expect that very much, if anything, could be given by then.

Whilst discussing the communist "pin-prick campaign", I asked whether it were really a continuation of what was already happening: Jay seemed rather surprised at this comment and said that the communist campaign had scarcely begun as it was still in the preparation stage. Jay said that he had recently heard a little more about the threatened campaign: Peking instructions vere to the effect that the opposition to the H.X.G. must appear to come from "the people". Thus general approval had been given for proposed activities of trade unions, the mini-van drivers' "association" and the anti-H.K.G. primary schools campaign which was reported at a recent discussion. Interestingly, Peking

SECRET

/contd...

SECRET

had been critical of the proposals to stir up trouble in the New Territories. According to Jay, Peking, in criticising the plans for the New Territories, had stressed the need not only for the trouble to appear to come from the people then- selves but also the importance of being able to keep such trouble under control: it was the Paking view that local communists were not likely to attract a great deal of support from Ney Territories people, and even if they had been able to cause trouble, Peking thought it unlikely the communists could control it or even, erhaps, the H.K.G. might not be able to control it; in these circumstances it was feared that the Nationalist elements in the Nev Territories could move into the picture and that with this type of escalation it was possible even that the militia in PO on County might get out of hand and create serious border incidents.

Referring again to the different policies which China is alleged to have towards the British Government and the H.K.G., Jay said that in his opinion the Chinese intended being more friendly towards Britain in the hope that either:-

(a)

(b)

by so doing, this may persuade the H.K.G. to adopt a better attitude towards China and local Chinese communists in the expectation that China would reciprocate;

the British Government say consider it important in its own interests to persuade the H.K.G. to improve its attitudes in the hope of further friendly gestures being made by the Chinese towards Britain.

In discussing the supply situation in China, Jay suggested that one of the reasons for the apparent shortage of cement and steel for export was the need to build fortifications on the Northern border. I asked whether he thought the recent reported border clashes between China and Russia could perhaps belittle more than a smoke screen to cover problems being encountered in calling the People's Congress. Jay immediately refuted this and said that the trouble between China and Russia vas very serious and that it was, if anything, more serious than the newspaper reports. He gave as his own personal view the possibility that the Russians had caused incidents on the border in an attempt to lend support to the anti-MAO groups in Peking the so-called revisionists and followers of the Russian way. I suggested that this could be a rather dangerous game to play as the opposite effect might be caused, i.e, consolidation of the various groups in Peking in the face of Russian aggression. Vhilst admitting this possibility, Jay suggested that the Russians had obviously weighed up the position well and nade their play accordingly,

Jay talked at some length on CHOU En-lai's position. He had little new to add to what he had already said in recent interviews, but for the first time mentioned problems which CHOU and other moderates were experiencing because of the aggressive

/contd..

SECRET

- Yes When yoom?

militant attitude adopted by YAN Wan-chuen, Once more, Jay repeated the alleged CHOU comment that Hong Kong "is a minor matter": he thought that CHOU was unlikely to be particularly helpful towards Hong Kong because he vas still smarting under the "rebuff" dealt him in November 1968 when he made specific proposals concerning the swop of Anthony Grey for the news- workers. Jay also made great play with the so-called loss of face which he claims the H.K.G. caused CHOU when scarcely any notice was given of the Board of Review decision on WONG Chak. I explained the H.K.G. position in forceful teras: Jay claimed that he understood the position perfectly but that unhappily such understanding could not be expected from CHOU.

جاتا

21st August, 1969.

(J. Cater)

C.C. Mr. Murray (P.C.0.) Mr. Denson (FEIING)

D.8.B. H.8.0. E.8.8.

SECPET

Mr. Murray

SECRET

With the Compliments of the

Political Adviser

Đảng ông

28/8/69

TSX 4/68

Political Adviser

SECRET

At Mr. K.C. Jay's request I saw him at 11 a.m. on Saturday, 23rd August.

Jay started the discussion by saying that he was anxious to obtain more detail and background information con- cerning the decision to require pig laans to make a deposit amounting to one month's rent. I explained the position in so far as I understood it and in the light of information available to me, but Jay indicated that he would appreciate more information, He explained this by saying that he had spoken re ently to LI Cho-chih and to a representative from China Resources: both had indicated that to date they had not been consulted on this matter and that in their opinion it was not a subject as yet calling for "high level decision", Apparently LI and the China Resources representative had both expressed concern to Jay that the supplies position in China was not good: they claimed that many of those peasants who had been involved in pig production or pig raising had either eaten the pigs or sold them - apparently many were not prepared or able to produce for the commune. In addition, China and Japan had entered into a trade agreement in which there had been difficulty over provision of acceptable foreign exchange to purchase the Japanese capital goods; accordingly, a barter arrangement had been agreed whereby a substantial quantity of frozen pork was to be sent to Japan. Jay said that these ship- ments had recently started and no doubt could be checked through official trade statistics, He said that he impressed on LI that the reduction in supplies to Hong Kong was very poor propaganda for China: impression that this was yet another indication of chaotic conditions in China; that when the influx of refugees vas taken into account perhaps Western observers would get an exaggerated idea as to the true situation, Jay suggested to LI that it was important that full normal supplies of pork to Hong Kong should be resumed as soon as possible, even if it meant less supplies for home consumption. Jay stated that LI appeared unhappy about this proposal, claiming that already there were serious difficulties in the interior over food supplies: LI said that in some districts rations had been decreased and, contrary to Former policy, farmers vere being encouraged to raise pigs privately and not necessarily officially for the commune. claimed that LI saw the force of his argument, however, concerning the possibility of poor publicity for China and under- took to inform Canton of the situation as soon as possible. feverting to the question of pig laans, Jay said that in his opinion the delay in imposing the Urban Council ruling had been to advantage as clearly the communists would think twice about taking advantage of the situation to cut off supplies temporarily for fear that it would be only too obvious to the public that it was an excuse to mask the supplies situation in China. However, at the end of the discussion with LI, Jay had been asked for his own personal view on the new Urban Council ruling concerning deposits and in particular whether he thought Government action to be reasonable or not: in the circumstances Jay asked whether he could have further information on the background to this decision in order that he may speak with some

that the outside world was gaining the

SECRET

/contd..

Jay

SECRET

- 2

knowledge and be able to defend the Urban Council position. In particular be asked for brief details of the previous system; why it had been thought desirable to effect a change; and in particular whether consideration had been given to calling the deposit a "payment of rent in advance". Finally, Jay advised that he was positive the local communist leadership would not vant serious trouble over this matter and that in his view the proposal concerning laans providing a banker's guarantee would be acceptable: however, he suggested that unless there vas great urgency it would be of value if he could pass on his personal v iews to LI and the China Resources representatives and so ensure that there was no serious difficulty when Government

enforced the ruling concerning deposits or banker's guarantee.

South China Iron Works

Jay said that he had now discussed with LI the H.K.G. proposals concerning the purchase of the land at Tsuen Van, had expressed disappointment at the price suggested, pointing out that the Bank of China was involved to the extent of HK37.7 million and that in addition there was another mortgage of HK$1.2 million. LI apparently again tried to suggest that the H.K.G. was not being reasonable in this matter but Jay claimed that he "soon shut him up" by again pointing out that if LI and the Bank of China were dissatisfied with the offer, then they could always make private arrangements of their own to sell the land - there could be no doubt, Jay told LI, that the H.K.G. was taking a most unusual step in giving such consideration to the Bank of China request. LI undertook to put forward his views to Peking in the near future. Jay informed me that, contrary to what he had indicated before, he had suggested to LI that the R.I.G. would be prepared to consider paying some $77 million for the land (you will recall that previously Jay hadti suggested that he would start discussions at the lower figure of $71 million).

(1)

Other matters discussed were:-

CHOU Ex-laf: Jay said that he had just heard from Paking that CHOU would be coming to Canton during September for a few days of discussions.

(ii) As suggested, I mentioned to Jay Denson's proposed visit

in September.

(xi) People's Congress: Jay said he was now quite certain that

the Congress could not be held before the October 1st 20th Anniversary celebrations. He regards this failure to call the Congress a serious set back for NAO and his supporters.

(iv) YIEN YEH Bank: Jay said that the communist bankers vere

very concerned indeed at this second robbery in a communist bank. A large meeting was being held that day in the Bank of China with a view to deciding what steps should be taken to improve security in comunist banks. Referring back to previous conversations I reminded Jay that again the Police

SECRET

/contd...

SECRE

were energetically investigating the incident and, as announced in the newspapers that day, had offered a revard for information, etc.

(x) Jay said that LI had indicated that there were four or Five "important problems" - "not urgent but important" which he wished to discuss with Jay within the next weak or 30. Jay suggested that almost certainly they were to do with Hong Kong and British affairs and that he would contact me directly be had spoken to LI.

20th August, 1969.

(J. Cater)

"ECKET

Mr. Murray

SECRET

With the Compliments of the

RA. DIVED IN

Political Adviser No.50

TRY

1969

Hong rộng

TSX 4/68

KH 3/30/

14.8.69

Political Adviser

SECRET 2

See Mv 20%.

Dr Willie Ray day.

17+ Both

17+ Cards. 219

I arranged to see Mr. K.C. Jay in the afternoon of Thursday, 7th August, as I had one or two points to raise with him:-

(1) Kennedy Town Slaughter House payment of deposit by comunist Big laans, Referring to our discussion on 24th July, I asked Jay whether he had any information or advice to give on this matter. Jay said he had spoken to China Resources representatives on this but at first had not obtained a positive response ? they tended to treat the matter lightly and said that in any event this vas a matter for MG FUNG HONG to deal with. Jay then clains that he pointed out the possible seriousness of the situation: that if the H.I.G, refused permission for the laans to operate if they did not pay the deposit, this would not only affect the supply of pork to Hong Kong but also would affect the income of the Chinese Government which in turn undoubtedly would cause Peking to be very angry. Allegedly, at a later discussion the China Resources representatives discussed the problem rather more seriously and Jay gained the impression that, although they were becoming slightly more concerned about the matter, nevertheless they felt it to be in keeping with local communist policy to cause minor trouble "pin pricks" - vherever possible but without it escalating into something so serious that Peking's attention might be drawn to it. Jay had intended at this stage advising the H.K.G. that they should proceed as proposed, /provis- i.e. to insist on the payment of the deposit or a banker's

ies of

guarantes, but then he had come into possession of information which indicated that local communists, and probably also Canton, would not be averse to a confrontation on this issue with the H.K.G., even to the extent of the supply of pigs being cut off, as presently there was a shortage of pigs in China and it was said that the need to supply even the Hong Kong market was becoming embarrassing. In the circunstances, Jay advised that the H.K.G. should hold its hand in this matter for a few days whilst he obtained more information on which to base advice.

(2) Border Incidents. Referring to recent discussions with Jay, I said that small incidents on the border continued: that if they were to go on there would be a risk of a serious situation developing. Jay said that he had sentioned this matter locally and had also recently written to Peking. Again, he felt that locally such action was regarded as "minor trouble" to cause the H.K.G. embarrassment. I asked whether this implied that the border officials were involved in, and agreed with, this policy; after some hesitation, Jay said that he did not think that this was the case and later agreed to comment on the situation when next he writes to Peking.

(3) I informed Jay that we had recently heard that permission had been refused the mission in Peking to send Anthony Grey books of an uncontroversial nature, Jay noted this but on reflection thought that it would be unwise to make a special issue of the matter as the date vas fast approaching when Grey was due to be released.

/Contd.......

SECRET

[

SECRET

During discussion of the above points, Jay had

repeatedly returned to his recent warning that local communists intended making trouble for the H.I.G, as a matter of policy

but that the trouble, he emphasised, would be "small and not big". I asked whether he had any specific information as to which areas

he communists would be taking this action in, and on this Occasion he suggested two:-

(i)

(11)

Jay said that the "Motor Drivers' Association"was putting out a great deal of publicity in an apparently successful drive to recruit mini-van operators: the main attraction was that the Association had allegedly made contact with police officers and could ensure that members of the Association were not prosecuted for traffic offences;

a detailed investigation was now being carried out into the quality of teaching at Government Primary Schools with a view to discrediting the Education Department. Local communist circles apparently felt that this presented a prime target and that there would be no difficulty in proving that standards in the Government Primary Schools were low and that in many instances parents preferred not to send their children to these schools. I suggested to Jay that a similar criticism could certainly be rade about the communist schools, but he replied that, whilst this was the case, nevertheless it could scarcely be used as a meaningful defence when the communists made their attack on the Government schools.

Jay said that it was becoming quite noticeable that there vas a difference in attitude and policy between Paking and Canton as to Hong Kong. The leadership in Peking appeared to be so busy with its own internal affairs that there was a lack of firm direction a tendency not to interfere unless there seemed to be an escalation into very serious trouble. In Canton, however, the line seemed to be similar to that of local Hong Kong communists: Jay had no doubt that Canton supported the "positive opposition but no big trouble" policy.

Speaking generally of affairs in China, Jay again epeated that the situation was very tense and that "very soon" there would be quite startling news from Peking. Again I tried to probe his as to precisely what he meant by this but could get nothing other than a long discourse as to the personal problems involved, CHOU En-lal's apparent opposition to HAO Tse-tung, and so on. By way of proof that CHOU was exceptionally busy, Jay said that recently a very senior person had been kept waiting nine days before CHOU could see him: Jay said that this was nost unusual as CHOU was well known for working long hours and for always being able to find time to speak to important people.

Reverting to his comments on the shortage of pigs in China, Jay said that shortage of supplies was generally the case and that already serious embarrassment was being caused as contracts negotiated at the Canton Spring Trade Fair could not be fulfilled,

SECRET

/Contd..

/to me

Lemigrate

good

SECRET

I had heard from another source that Jay had recently applied for approval to emigrate to Canada: indeed at a dinner two days before Jay had hinted that he might be going to Canada in the not too distant future, although this had been in the context of a visit to his sons rather than permanent emigration. Referring back to this dinner-time conversation, I asked whether Jay intended to leave for Canada in the near future: he was immediately embarrassed and said that there was a subject which he had been meaning to discuss with me for some days the question of obtaining permission to emigrate "permanently" to Canada. Jay said that this all really started about two years ago when his eldest son, Alfred, without Jay's knowledge had applied to the Canadian Immigration authorities in Ottawa for his mother and father to come to Canada. In the circumstances 1967 disturbances Jay felt that this was an understandable and proper thing for Alfred to have done, but of course there could be no question in Jay's mind of leaving Hong Kong "whilst the British are here". He had only recently re-started action on this as a result of a discussion he had had with Mr. Bob Wales (Immigration Officer, Canadian Trade Commission) who, referring to the matter had suggested to Jay that perhaps Jay would prefer the application to be processed by his rather than wait for his successor. Jay had thought this a good idea and accordingly had gone ahead with the application: Jay explained that normally, depending on family situation, financial standing, etc. only those with 50 points or above were allowed to immigrate to Canada very proudly he told me that his score was 94. Jay then at great length explained to me that there was no possibility of his being able to go to Canada as his business interests required him to stay in Hong Kong indeed the maximum time he could be away from Hong Kong would be five days. He was proceeding with the application mainly to please his son, Alfred, and his wife (and, I suspect, his concubine) and also to take advantage of Wales's offer. In any event, Jay said "I am absolutely certain that nothing untoward will happen in Hong Kong for the next 10-12 years". Referring back to our conversation of 19th June, I suggested that this was perhaps a little more pessinistic but Jay thought not: be felt the position vis-a-vis China could be considered in the very long term but he did not know whether this necessarily applied to Britain and as regards his appli- cation to emigrate to Canada he said, not unreasonably, that countries like Canada and Britain were constantly having to consider their laws regarding immigration and that it was therefore as well to make sure now rather than to be sorry later on. He expressed concern that his application had been held up by the Special Branch: I asked him when he had made his application and he said about 26th 27th July. In the circumstances I said that I was sure that his application was not being held up by the H.K.G. and that if he had only made application some 11 or 12 days before it was probable that the application was still with the Canadians. Jay denied this and såld he knew it was with the Special Branch.

11th August, 1969.

C.C. Mr. Murray (P.C.0.)

Mr. Denson (PEKING)

D.5.B.

H.S.G.

B.S.

باشا

(J. Cater)

SECRET

7/8/69

Mr. Murray

MGA8

Miz Any.

With the Compliments of the Me wide

Political Adviser

ра

Hong Kong pa

По водаритель на сука

TSX 4/69

o.♪.

26/5

Political Adviser

SECRET

As you are aware, I made arrangements to see Mr. I.C. Jay on the afternoon of Friday, 1st August, primarily in order to give him details of our proposals in regard to the South China Iron Works land at Tsuen Wan.

No sooner had I given Jay the reason for my visit than he interrupted to say that in the last day or two he had received "several further approaches" on this matter and that it was clear to him that Peking was behind the pressure being applied: it later transpired that these "several further approaches" had been made by two people, unnamed, from the Bank of China.

I talked to the attached brief but gave no detailed information of the estimated cost of the "deductions" nor of the 10% contingency, but simply referred to cost of nullahs, roads etc. including resettlement of people in the area and then indicated that this work would cost in the region of $6.2 million: thus leaving the offer at about $7.8 million. As agreed with H.E., I sought Jay's advice as to whether a firm figure, say, of $7.8 million should be offered or whether there should be an element of bargaining with our offer starting at $7 million,with a maximum sticking point of, say, $8 million. Vithout besitation Jay said there should be an element of bargaining in this: later in the discussion he proposed that the starting point should in fact be $71 million. I enquired whether this might not appear a little on the low side in view of the previous suggestion from the Bank of China that they thought an offer in the region of $10 $11 million would be appropriate: in saying this I reminded Jay once again that the figure had been arrived at on the specific basis that the offer should be fair to all concerned. Jay said that be appreciated this and that he vas not pessimistic at all about the Chinese reaction to the offer: indeed over the past few months, because of the delay in reply, he had thought it desirable to prepare the Chinese for either no offer at all or one substantially lower than previously suggested. claimed that in these discussions there had been some suggestion and criticism that the H.K.G. would make a "good profit" out of the deal but Jay allegedly silenced all opposition by referring to the obvious fact that the H.I.G. vas going out of its way in taking a very unusual step in considering this proposition and that it still remained open to the S.C.I.V. and the Bank of China to settle their affairs privately: the thought of taking action against somebody resident in Taiwan or becoming involved in problems of moving Nationalist supporters from the Tsuen Wan land apparently appalled the critics. In the aircumstances Jay felt that, although undoubtedly there had to be grumbles and some fairly hard-headed bargaining, nevertheless the H.K.G. offer would be seen by the more reasonable as being a fairly good one.

I went on to explain to Jay the problems involved in timing of this offer: that the offer would have to be approved by Finance Committee, which was due to meet next on Wednesday, 6th August, but that it would not be meeting again for another four veeks. Jay promptly said that it would bé virtually impossible to obtain a reply by tk August:

August; in any event he was not anxious

/contd.........

SECRET

to put the offer immediately to the Chinese as this could wrongly be interpreted as being a response to the very recent pressure which had been applied to him, In any case it would take him several days to put the proposal across to local Bank of China officials and even then they would have to consult Peking. Be thought it vise that some indication of a date should be given for a reply and said that he would talk in terms of 10 days to a fortnight. I said that, whilst obviously we would be guided by him in this, nevertheless he should be careful in the circumstances not to suggest datelines which might prove impracticable to meet. Jay advised that he would be seriously embarrassed if this matter were put to Finance Committee before the Bank of China had consulted Peking and produced a reply: he suggested that anything on a subject like this which was put to Finance Committee would be known to officials in the Bank of China within an hour or two of the Finance Committee meeting breaking up this information being passed by

Mr. P.C. WOO.

The meeting with Jay became quite lengthy, Jay going over and over again the way he would approach the Bank of China on this matter and referring at length to the fact that one of the problems facing the Bank of China at the moment was the fact that mortgages on the 8.C.I.V. land were in two parts and that there was a need for "somebody" to tidy up the financial and legal matters now out- standing before the deal was finally agreed. It soon became apparent although obviously he did not say so openly - that the "somebody" in question would undoubtedly be Jay himself, hoping no doubt to pick up some agency fees. By the end of the two-hour meeting Jay was decidedly optimistic.

Other points which were made during the discussion were:

(1) Jay said that he had recently received confirmation from the Prime Minister's office of part of the discussion which CHOU En-lai had with FEI Yi-ming during the latter's visit to Peking some veeks ago. Jay said that it generally confirmed what had been reported already in Hong Kong but he thought it might be of interest for me to hear of one exchange in particular. Apparently FEI had been roundly criticized for the part he had played in the 1967 disturbances and in defence of himself he had asked CHOU why China had to be friendly towards Britain: allegedly CHOU had replied rather sarcastically "I don't know whether we have to be friendly or not, but we need Hong Kong - and therefore Britain - and there- fore it seems sensible to be friendly". Jay was delighted with this and repeated it time and again and said it was yet another example of the good sense of the Prime Minister.

(2) When talking of Peking, Jay said that Government officials continue to express surprise that LIN Piao vas becoming more and more friendly towards CHOU En-lai and was almost ingratiating himself with him. .

(3) I asked Jay what he thought of the local situation: he said that local communists were undoubtedly making efforts to woo villagers in the New Territories and in this he thought they were achieving some success. Other points of attack continue to be hawkers and mini-van drivers. Be suggested that Government should

/contd....

-3-

take more positive steps to improve relationship with the community generally but was rather vague as to what these steps should be: be sent ioned two better educational facilities and more realistic labour laws (he thought it unrealistic that the H.K.G. should prevent young people working in industry before the age of 14 when many of them had left school at 11 or 12 and had nothing to do but go on to the streets). Jay also suggested that the H.I.G. should avoid obvious problems and gave as an example the Taivan Film Festival at the City Hall: he suggested that if it had not been for his efforts to calm down local communists, there might well have been some unpleasant incidents.

(4) In view of the comment above, I said that it was almost invariably the case that in circumstances such as these Government vas unaware of the "obvious problem" until it became a fact. I gave as an example the Travel Agency Conference which had been arranged to take place in Hong Kong at the latter half of September and finishing on 1st October. The first that Government had heard of this was when the Conference was announced publicly and at which time it was also learnt that Russia had stated its intention of attending the Conference, Jay made a note of this and rather surprisingly said he did not think that there would be any trouble because of Russia's participating in the Conference: indeed, he then went on to say that, provided local communists vere advised ahead of time that things like this might happen, he did not think there would be serious adverse reaction. He then commented that Chinese communists vere embarrassed by things to do with Russia and Taiwan but at the same time vere unsure of the precise public relations action they should take: he explained this by saying that the communists felt themselves very vulnerable in relation to activities concerning Taiwan: that they were concerned that, if they were to make too much of a fuss, the very reasonable point might be made that, instead of talking so much about Taivan, they should start putting their words into action for example, invading Taiwan and so, knowing this was beyond their capability these days, they tended to keep quiet on the subject.

Jay telephoned me on Sunday, 3rd August, to say that LI Cho-chih was in Canton and would not be back until the 8th or 9th August: in the circumstances a reply on the 8.C.I.W. land could not be expected for another three weeks or so. He also indicated that "others" among the local communist leadership had gone to Paking and were expected to be away for some time.

là August, 1969,

C.C.

Mr. J. Murray (F.C.0.)

J.B. Denson (Peking)

D.8.D.

H.8.0.

E.8.8.

(J. Cater)

v/o encl.

5/8/69

MR. MURRAY.

With the Compliments of the

Political Adviser

Hong rộng

Kong

3/4

(12 Aug. Me Bane shine,

Mr Wilson

M. C

Cantiga

o.r

75+4/68

SECRET

Political Adviser

Mr. K.C. Jay telephoned during the morning of Thursday, 31st July asking to see me urgently: accordingly I arranged to see him at 4.30 p.m. that afternoon,

Jay said that the main topic of urgency he wished to discuss concerned the South China Iron Works land at Tsuen Wan I he had now heard from two sources that the matter was considered important and of sone urgency by Peking. LI Cho chih, the Manager of the Bank of China, had reported that his Headquarters very recently had enquired what the position was on this land and had been critical of the delays encountered. Jay claims that he had reacted rather angrily to suggestions by LI that the delays showed a lack of sincerity on the part of the H.K.G. It was Jay's opinion that the pressure from the Bank of China was aimed at him and not at the I.1.0. Referring to a previous conversation, Jay said that it was now quite certain that the issue had become more political than financial: he also had received enquiries on the matter from Peking, together with an expression of hope that the matter would soon be resolved. Jay, although claiming to be anxious to see this matter resolved soon and satisfactorily, went on to remind me of the position: that if the H.K.G. were to agree to a deal being concluded it may or may not lead to an improvement in the situation in teras of relations with China and future co-operation: on the other hand, if the H.K.G. were not prepared to conclude the deal, then certainly the Chinese would not be co-operative in their future relations. Jay described this as a typical communist ploy and expressed disappointment at the pressures they were bringing to bear.

Referring to my discussion with him on 24th July, Jay said that he now had specific information concerning a move to set up an additional channel into the Hong Kong Government: be had found that the initiative had come from CHÂM Hung of the Bank of China who had made approaches to Mr. Martin Curran of the Hong Kong Bank. Curran apparently had mentioned this matter to Jay who had taken the opportunity of firstly advising Curran to have no dealings with CHAN on this matter, and secondly of having a warning given to CHAN through LI Cho-chih to cease his activities. In the circumstances, Jay considered the matter closed and said there vas therefore no need for me or the H.K.G. to take action.

Talking of the local situation, Jay said that there had been an interesting recent development in the control and decision-making machinery of local communist organisations, Working on instructions from Peking these organisations, including W.C.H.A. and the Bank of China, now had an executive committee (or as Jay called it, a "Cabinet") to deal with major problems, particularly those of a political nature: Jay thought that the reasons for this move included two possibilities: either (1) the executive committees had been" found necessary because of disagreement among senior personnel and the committee

/contd.......

پیام

나

on den!

SECRET

- 2

vas a device for bringing these people "in line" and making decisions a group responsibility; or (2) an attempt to take individual personal authority away from the senior man in the organisation.

VAS TONSE

Jay said that instructions had recently been passed to local communist organisations that, when referring to Britain and Hong Kong the comparison should be made that, whilst the British Government was "imperialist" the Hong Kong Government

I asked why it was thought necessary to make this differentiation and went on to explain the situation vis-a-vis the British Government and the Hong Kong Government. Jay replied that the communists understood the position well enough but that for some time now there had been criticism both in Paking and in Hong Kong that the Chinese communists seemed to be concentrating their efforts against the H.I.0, rather than against Britain: it was in the interests of local Hong Kong communists that they should be able to show that it was the H.K.G. vhich was persecuting them and causing trouble this not only rationalised their actions here in Hong Kong but also, and of greater importance, provided reasons why subsidies and aid from Peking to the various local organisations were necessary: in particular, Jay mentioned financial help being given to newspapers,

Jay then went over some of the ground covered in our recent discussion on 24th July and repeated that it was now clear that the confrontation with the H.K.G. would continue for some time: that it would be "fragmented" and, although not very violent, nevertheless it would be positive opposition. enquired whether this would include, say, difficulties following the sentencing of the Waterworks trade union people but Jay immediately said that he expected no serious trouble as a result of the court case: that, although for a while the newspapers would have to play the matter up, nevertheless it would not be taken beyond the public relations field.

Jay said that he had been in receipt of some very interesting information from Peking. He confirmed that the situation there was becoming tense: that it was now quite clear that the opposition to MAO was led by CHOU En-lai and that because CHOU was withholding his support and allegedly that of the Communist Party, there was some doubt as to whether the People's Congress could now be called. According to Jay, the main problem centred round CHOU's insistence that he should have the right to nominate people to six key posts allegedly one appointment had been agreed and there was partial agreement for another, but this was not acceptable to CHOU. Jay repeated that if a Congress were not called before the 20th Anniversary celebrations, or if the Congress were seen to have been called in a hurry, then it would have been seen that MAO had been defeated. Jay (a strong CHOU supporter, of course) saw in all this the true genius of the Prime Minister and was optimistic that CHOU would be successful: Jay then said what he had said so often before that if this were the case it would be very such in Hong Kong's interest.

جا پاکستان

1st August, 1969.

(J. Cater)

c.c. Mr. Murray (London)

D.8.3.

Mr.

Denson (Peking)

H.8.0.

F.8.$.

CR. 41A

2600077

5,000-2/69-870130

REF. TSX 4/68

TOP SECRFT

Dear Janes

Copy No i

of 2 COPIES

COLONIAL SECRETARIAT

LOWER ALBERT ROAD

HONG KONG

5 August, 1969.

And in May

Mr Bayor B1378

Mr Wilson o...

Пе

In your letter FEC 13C/1 of 22 July you asked for our opinion about the remarks made to Jack Cater about the relative unimportance of 1997.

19/3314

It has always been one of our main problems during these secret contacts to judge to what extent K.C. was reporting the views or the instructions of the Chinese Government and to what extent he was expressing his own views. Jack Cater and I consider that on this occasion he vas speaking without instructions and expressing his own opinion.

Since you wrote your letter you will have received the full account of Cater's conversation. It does not add much to our telegram No. 497 but it does show that 1997 was first mentioned by Cater. K.C. was responding to that remark and did not himself initiate the reference.

84%

अद

is/8.

You will also see that on this occasion the conversation was fairly lengthy and slightly more relaxed than usual. K.C. was acting out his part as a loyal British subject, long-time resident of Hong Kong and independent adviser to the Hong Kong Government. This side of his character may have been obscured for readers of Cater's reports since in them K.C. usually appears as the intermediary with the Chinese Government and therefore to a large extent as an agent of the communists. But the other side of his character is quite important. His future is bound up with that of Hong Kong and all his instincts and habits are essentially capitalist.

Even if the remarks vere K.C.'s personal views and not something he was passing to us on instructions from Peking, they are still of interest. He sees enough of our local communists to have quite a good idea of the course of Chinese policy. A few months ago I read through all Cater's reports since these exchanges started and I vas left with quite a strong impression that K.C.'s comments on communist policy were well informed and valuable whilst his usefulness as a negotiator or as a link in a negotiating chain vas small. I think there- Fore that his comments on 1997 do have some value as an indication of how the Chinese Government may think: but obviously they need to be treated with very considerable caution.

I have shown this in draft to Jack Cater, who agrees

6. with it.

J. Murray, Esq., CMG,

ever

You

tother

(A.F. Maddocks)

Foreign & Commonwealth Office, TOP SECRET

LONDON, S.W.1.

24/7

MR MURRAY.

pa Jaya

With the Compliments of the Bo

Political Adviser

Hong rộng

Mr Sanghuava 13/0

Carl

O.R

12018

Ref.

TSX 4/68.

SECRET

/the

Political Adviser

I made arrangements to see Mr. I.C. Jay at 2.30 p.m. on Thursday, 24th July, Unusually, Mr. Jay was late for the appointment: he had just attended, with his sons, a large luncheon party given by Bank of China officials.

I informed Jay that I had one or two minor subjects to discuss with him but before I could launch on to my short list he started to tell me the latest news froz Peking and on the Hong Kong front:-

(1) According to Jay, the situation in China was poor: a great deal of opposition was building up against HAO's policies and be fully expected that this opposition would soon be shoving itself openly. Already in Canton the opposition was being spelt out in forthright terus and he had no doubt that elsewhere feelings ware also running high. Jay expressed surprise that to date little of this feeling had been reflected or reported in Hong Kong.

(2) Jay felt that, as a result of the opposition to MAO's policies, there was some reluctance to proceed with/calling of the People's Congress: from MAQ's point of view it was essential that the Congress should be held soon in order to put the final touches to the dismissal of LIU Shao-Ch'i as President of China. If the calling of the Congress and the formal deposition of LIU vere not achieved by October 1st, Jay felt that this would be a serious defeat for MO (presumably LIU's dismissal should be tidied up in time for the 2017 Anniversary of the communist victory on the Mainland).

(3) Jay reported that in the circumstances outlined above it was difficult to assess the precise position of CHOU En-lal; information received from the Prime Minister's office indicated that CHOU continued to gain strength and to improve his position in the comunist hierarchy, but with the situation rapidly becoming fluid again Jay felt it inadvisable to be too firm in his predictions.

(4) Jay said that the position locally in Hong Kong was also rather different from what he had forecast it would be some nonths ago; many of the local communists mainly responsible for causing the 1967 disturbances had been noted some months ago for early removal or transfer back to China - now, however, it seemed that they would be retained in their posts. There were indications that local communist policy would harden against the H.K.G. do not expect riots but certainly there will be some open opposition and defiance".

Jay seemed genuinely concerned about the situation and it was my assessment that he was reporting what he honestly believed. Having spoken for Jay in forthright terns, he then gave the impression of thinking that perhaps he had gone a little too far and suggested that this assessment, particularly the forecast of increased opposition by local communista, should be treated in the strictest confidence between ourselves and he asked that I should

/contd....

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not pass the information further.

In a rather odd series of comments he said that it was only after many months that he had come to trust me and therefore felt able to say what was 'really in his heart'.

At this stage I was able to come back to the reason for my interview with Jay and make the following points:-

I informed Jay

(1) TANG Chuen - Board of Review recommendation: that the Board has recently recommended a reduction in one of TANG's two consecutive sentences and that he was now due for release on or about 10th December 1970. I advised Jay that other cases due to come to the Board of Revier vere in respect of the longer term prisoners and that it was now highly unlikely that the Board would be recommending any further reductions in sentence as in all cases the prisoners had been convicted of serious charges.

(2) As requested, I explained to Jay the situation in respect of Michael Hannam's transfer and his replacement by Blackwell: that the South China Morning Post had rather over-played the situation in its special report on Blackwell and that in fact the post is not to be upgraded because of Blackwell's arrival.

(3) Lease of Pig Pens: I explained to Jay the position concerning the leasing of pig pens to laans in the new Kennedy Town abattoir. I said it was highly desirable that the seven communist laans should pay the required deposit amounting to one month's rent, but that if this were quite impossible to arrange, then Government would be prepared to accept a banker's guarantee. Jay said that he would see what he could do to influence NG FUNG HỌNG and through them the laans: he agreed that it was far better to encourage them to fit in with official arrangements, although he really could see nothing wrong in proceeding by way of a banker's guarantee 'except, of course, Government would not then be getting an interest-free loan".

(4) As requested, I mentioned to Jay the problems recently experienced on the border and in particular the various incidents at Sha Tau Lok. I repeated what I had said at a recent meeting, that whilst in themselves the incidents might seen sinor and the result of actions by people of low intelligence, nevertheless they could in themselves lead to serious difficulties and certainly when taken in aggregate they formed a serious source of annoyance. Jay noted the position but enquired whether an approach had been made to K.C..A. as agreed in 1967, x.C.N.A. would be the contact for minor border problemas.

I said that the N.C.H.A. had indeed been contacted on this but nevertheless we now thought it sufficiently important for Jay to know of the situation and to be in a position to` advise the communists of the risks involved. Jay thought it was probably of little value for him to raise the matter locally but he said that he would mention the matter next time be wrote to Peking.

(5) South China Iron Works: I advised Jay that this matter still under consideration: that the Governor vas taking a personal interest: that B.B. vas anxious to see that any offer made shoili be fair to both sides and that he would ensure that from the point

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of view of the S.C.I.V. the price offered was reasonable. informed Jay that the indications were that the offer would be n the region of $8 million, Jay said that he was pleased to Hearn that this matter at long last was nearing completion. He said that although in the past he had given the impression that this was a fairly straightforward financial proposition, nevertheless I should now understand that there were important political aspects attached to the matter which should not be ignored. He expressed the opinion that it was of the utmost importance that an answer should be given in the very near future and that, rather than have further procrastination, he would prefer to see a negative answer given. I again assured Jay that a reply would be given in the "near future".

Jay made two further points:-

(1) He had recently been advised that because of lack of satisfaction with the existing Jay/Cater channel, an attempt would be made to set up a channel to the H.K.G. through Jake Saunders of the Hongkong & Shanghai Bank. Jay asked that this information should be kept "secret between ourselves" as he felt that he could handle the situation. Jay suddenly went very red

in the face when telling me of this attempt to set up a new channel, and I gained the impression that this was probably a figment of his imagination. I asked whether he wanted me to have Saunders varned off but he became rather agitated at this suggestion and said that the whole thing should be left to him to handle.

(2) Referring back to mention of M.C.N.A., Jay enquired whether I knew that TÂM Keng of N.C.N.A. (the contact in N.C.N.A. used by

I said that I Mr. Robin McLaren) is an ex-Government Servant.

was not aware of this and Jay said he believed TAN used to work in the Colonial Secretariat and advised that we should be very careful in our dealings with him as TAM had maintained contacts in the Secretariat.

(J. Cater)

c.c.

Mr. J. Murray, CMG (F.C.o.) Mr. J.B. Denson, OK (PEKING) D.8.B.

H.S.Q.

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T3x. 4/68

100

dee

30 July

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With the Compliments of the 6s Caytes.

Political Adviser 667

Hong Kong

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17 Juky, 1969

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Le.g. Hamilton

or Holmes

Political Adviser

I made arrangements to meet Mr. K.C. Jay at 12 noon

on Saturday, 12th July.

Jay said that be had no specific information to pass on to me, although he had received from the Prime Minister's office in Peking a letter giving general comments on the situation there. Allegedly CHOU En-lai's position was steadily improving after the all time low it had reached at the time of the gth Party Congress. There were rumours in Peking to the effect that HAO was not very well disposed towards CHOU but clearly realised that he was in no position to oust CHOU. On the other hand, LI Piao allegedly had made a great deal of effort to be pleasant to CHOU and in recent veeks had seen a great deal of hin, Jay advised that "important soves" være about to take place in Peking which would cause quite a stiri I asked for more details of these moves but Jay was not forthcoming.

The following subjects were discussed briefly with Jay:-

(1) Jay said that recently Paking had instructed the x.C.N.A. Hong Kong to "cause no new trouble":

so new trouble": Jay thought that this possibly a follow-up instruction to a report he had made to Peking after I saw him on 23rd June. Jay was not particularly impressed by the Peking instruction as he felt it was too loose and could possibly be interpreted by the N.C..A. as being tacit approval for action already taken or in hand but a warning not to stir up anything "new",

(2) IU Nong-kval: as agreed, I informed Jay that a warning had been given to the 3.C.X.A. that IU had been seen on two or three occasions in British territory and that it should be appreciated that he was liable to arrest.

(3) Referring back to my meeting with Jay on 19th June, I said that it had occurred to me that his comment that it would be unwise to have a Chinese as Governor or Colonial secretary might have been prompted by a comment made by the Colonial Secretary on arrival in Hong Kong concerning localisation of the Hong Kong Civil Service and the possible appointment of a "local man" as Colonial Secretary. I said that in this context the Colonial Secretary was not referring to local Chinese but simply toserving members of the Civil Serviceć It was immediately clear that the discussion on 19th June vas à direct reference to the C.5.'s statement, for Jay at once gaid that it was this comment which had caused some concern:

se concern: the position was now fully understood.

Jay was clearly delighted that H.E. the Governor had spoken to him at the cocktail party for Canada's National Day on 30 June: be made several references to this during the discussion and on one occasion said that he was particularly pleased that the Governor had given him so much time as this had been noticed by representatives of China Resources Company who vere also present at the cocktail party and undoubtedly would be reporting back to their superiors.

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I mentioned to Jay that representations had been made to the W.C.H.A. concerning firework rockets which had been aimed into British territory from across the border: said that incidents had been much reduced recently but, hopefully, they would be stopped altogether as in certain circumstances they could unfortunately cause an unpleasant incident. Jay said that he would take the opportunity of mentioning this when an occasion arose.

6. McL

I mentioned to Jay the possibility that Mr. Robin of your office might be going to Peking: I explained the circumstances.

Jay asked whether I had any further news concerning the South China Iron Works land. I said that I had nothing specific to say to him but assured him that the matter was receiving consideration. Jay said that he had spoken to the solicitors recently who had suggested that if nothing were forthcoming from the H.I.G. in the near future perhaps the visest move would be for the Bank of China and the S.C.I.V. to accept completely the proposals of the H.K.0, which vere still valid two years ago. Jay said that he had rejected this advice, as clearly it was intended to embarrass the H.K.G. rather than provide a satisfactory solution to the problem.

мо

(J. Cater)

10th July, 1969.

c.c.

Hr. J. Murray, CMG (F.C.0.) Mr. J.B. Denson, 038 (PEKING) D.8.9. K.5.G.

E.S.$.

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