How to negotiate with China

When Margaret Thatcher signed a treaty to hand Hong Kong back to China, it was a diplomatic tour de force which served the city’s people well for decades. It was also an unsung victory for the international order.

Margaret Thatcher in China in 1984 signing the Hong Kong accord.
Margaret Thatcher in China in 1984 signing the Hong Kong accord. Credit: Peter Jordan / Alamy Stock Photo

In 1982, Margaret Thatcher, the prime minister of the United Kingdom, faced a dilemma. She commanded respect, even among foes, for sending a military expedition to recapture the Falkland Islands, a scantily populated British dependency, from Argentina. But on the other side of the world, the fate of 5.5 million British subjects in Hong Kong presented a problem that could not be solved by force of arms.

Hong Kong was a Crown Colony from the mid-nineteenth century, ruled by a British governor with a flag, a whitewashed residence, an advisory council drawn from the elite, a garrison of land, air and naval units, and eavesdropping stations which collected intelligence from China. It was a Cold War asset and a stout prop for British commercial interests in the Far East.

This was, however, a ‘borrowed place on borrowed time’, as the journalist Richard Hughes, the prototype for a character in John Le Carré’s novel The Honourable Schoolboy, put it. Fresh from victory in the Falklands, the prime minister had to deal with the fact that time was running out.

How she did so is a masterclass in statecraft and a lesson in how democracies can deal with myth-making dictatorships, even when the odds are fearful. She realised, while some of her advisers did not, that diplomatic language crafted in another age could still be used effectively against a revolutionary regime, and she turned international law into a weapon.

Hong Kong became a British possession by virtue of three treaties. The first was the Treaty of Nanking, signed on 28 August 1842 aboard HMS Cornwallis  to end the Opium War between Britain and the Qing Empire. It is remembered in China as the first ‘unequal treaty’, a shameful deed by a mandarin who fed sugar plums to Sir Henry Pottinger, the British envoy, while affixing his great red seal to the document.

The treaty granted the island of Hong Kong to Britain in perpetuity, opened five ports to trade, abolished monopolies held by Chinese merchants, set tariffs, imposed a huge indemnity in silver, and formally buried the language of subservience which the imperial court required of foreign powers.

It was not, in fact, the emperor’s first concessionary treaty: that was a pact in 1835 with a Muslim potentate, the predatory Khan of Kokand in Central Asia, which included the right for the Khan’s emissaries to try cases and levy taxes in China’s western approaches, the principle of ‘extraterritoriality’ which vexed all Chinese dealings with the powers.

The notion that the Treaty of Nanking was ‘unequal’ and thus invalid became a standard part of Chinese diplomatic discourse. Yet the records of the time show that appeasement was a policy choice, a tactic employed by a weakening dynasty. Nor – communist propaganda apart – was it chiefly about opium, which had been in the Chinese pharmacopeia perhaps as early as the fifth century.

The problem was that appeasement did not work. In the 1850s, chaos and hatred consumed the realm of the Qing, a line of Manchu rulers alien to the majority Han Chinese. The foreign powers pressed for more concessions, the emperor temporised, the western armies burned his summer palace to the ground, and the Convention of Beijing of 24 October 1860 awarded Britain the tip of the Kowloon peninsula facing Hong Kong island, also in perpetuity. This was the second treaty establishing British rule.

The third act came at the end of China’s long nineteenth century. Defeated in war by Japan, refusing to reform yet unable to govern, the dynasty conceded the loss of Taiwan and part of Manchuria plus a vast indemnity, financed by the Hongkong and Shanghai Bank, which set up the Japanese capitalist system.

Three years later China gave in to pressure from Britain and granted a lease of 99 years on the islands and land known as the New Territories, more than 85 per cent of modern Hong Kong. Ironically, the Foreign Office opted to pursue a lease rather than full possession because it did not want to set a precedent for rival powers eating away at the fabric of the empire. The Second Convention of Beijing of June 1898 set the lease expiry for 30 June, 1997. This was the guillotine which faced Thatcher.

We now have a set of documents from the British archives, together with five principal memoirs from the Chinese side, which unfold what happened next. In the 1970s, China emerged from its totalitarian experiment under Mao Zedong to deal with realpolitik. The new paramount leader, Deng Xiaoping, summoned the governor of Hong Kong, Sir Murray MacLehose, to his presence in 1979 to say that China would certainly take back all Hong Kong in 1997 but investors should ‘put their hearts at ease’. A sophisticated and cosmopolitan revolutionary, Liao Chengzhi, worked out a theory of ‘one country, two systems’ to explain how capitalist Taiwan and Hong Kong could revert to the motherland.

Such was the bargain proffered to Thatcher, who was not impressed. To her, China was a desolate totalitarian monument to the failure of communism. On her first visit to the country, while in opposition, she was escorted by John Gerson, a thoughtful Cold Warrior who later rose to high rank in Britain’s Secret Intelligence Service, MI6. The idea that she could simply consign millions of the Queen’s subjects to its regime was abhorrent to her.

Nonetheless, it was an idea which appealed to the diplomats and businessmen who circled the prime minister in Downing Street. Her Foreign Secretary, Francis Pym, submitted a memorandum in which one urbane phrase stood out: ‘We must not allow our consideration for “the wishes of the people” to develop into acceptance of the paramountcy of the will of the population, that would not be realistic.’ In Thatcher’s archive one can see her retort in blue ink: ‘This paper is pathetic and it is a recipe for a sell-out.’

The bankers and tycoons in Hong Kong murmured about stability, talked of Deng being ‘pragmatic’ and thought that Britain might hand over sovereignty but continue administration because, as the head of HSBC, Michael Sandberg, said, the idea of Chinese rule was ‘a disaster scenario’, while the head of the Chamber of Commerce, James McGregor, assured her that the people of Hong Kong ‘need not be consulted’.

All of them underestimated Thatcher. As a lawyer who grew up in the 1930s, she felt that treaties were sacrosanct. Her negotiator, David Wilson, later the 27th governor of Hong Kong, recalled her faith in the legal principle of pacta sunt servanda – agreements must be kept. Britain would end its lease in 1997 but it held Hong Kong island and part of Kowloon in perpetuity. She thought Hong Kong island might even become independent, like Singapore.

Apart from this prospect – we now know independence would have been a casus belli for China – there were few options. They were summed up by the Chinese negotiator, Zhou Nan, a staunch Marxist and a scholar of Shakespeare, in an oral history memoir:

‘This so-called Iron Lady had just won the Falklands War and taken the Malvinas from Argentina. She didn’t want to return Hong Kong to us at first. She considered international co-ownership, a referendum, a second Singapore, even a military confrontation with China.’

There is scant evidence that Thatcher gave prolonged consideration to any of these ideas. They exasperated the experts but she was not wrong to think them over. It turns out that the Chinese premier, Zhao Ziyang, was privately ready to compromise until Deng set a rigid party line. But the British government did not know this at the time.

The documents show that Thatcher grasped the big picture. The risks went beyond the Anglo-Chinese dispute. The Cold War powers put their trust in a skein of agreements, from a divided Berlin to a divided Korea, to reduce the risk of nuclear war. China itself relied on the Treaty of Nerchinsk, drawn up by Jesuits for the Kangxi emperor in 1689, to fix its border with Russia. If treaties were casually broken, the law of the jungle would return, as it had done before the Second World War, when China had been a victim of lawless militarism. The stakes, then, were higher than the fate of Hong Kong. They were limitless.

The prime minister turned to a man ‘whose ability to reach a clear and vigorous intellectual position’ – she wrote – ‘might sometimes be a little unnerving’. The ambassador to China, Sir Percy Cradock, became her foreign policy adviser. An old China hand, he endured beating and humiliation when Mao’s Red Guards sacked the British mission in Beijing. ‘I do not dispute that the Chinese are being unreasonable and intolerable,’ he observed later in life, ‘of course they are, they have never been anything else.’

Cradock was at Thatcher’s side when she met Deng Xiaoping in the Great Hall of the People on 24 September, 1982. It did not go well. She placed her black handbag on the floor. Chain-smoking, Deng interspersed his remarks with expectorations into a spittoon placed by his feet. He treated it as an exercise in dialectic. He had no regard for the ‘unequal’ treaties. China would regain all of Hong Kong in 1997. He could march in and take it in an afternoon (or so Thatcher recalled; her note-taker, Bob Peirce, did not hear these exact words). Whatever the quote, she was shocked.

Facing an omnipotent ruler, it would be easy to fold. But Thatcher had space to manoeuvre. She held strategic cards. China was weak and impoverished. It had a vast peasant army and nuclear bombs; one was obsolete and the other of no practical use. Its leaders feared a first strike by the Soviet Union. It had gained little from reconciliation with the United States. Deng had to join the world in order to realise his modernising economic reforms. They were the key to China’s future.

All the accounts agree that Thatcher composed herself and told Deng that if China seized Hong Kong, it would lose everything. She realised that China did not recognise the ‘unequal’ treaties but she believed they were valid. Her aim was ‘if those treaties were to be changed, they should be changed by agreement and not abrogated by one side or another’.

That night, Deng did not attend the banquet in his honour, preferring to clink mao tai glasses with a more congenial guest, the dictator of North Korea, Kim Il Sung. But by standing up to him, Thatcher had sown doubt in Deng’s mind. The communist leadership could not be sure what she would do in a showdown. Although China never took invasion off the table (it still had special forces poised to act at the handover itself), it chose the path of diplomacy. That is one valuable lesson for envoys tempted to tell autocrats what they want to hear.

This did not mean that the diplomacy was easy. China skilfully used delaying tactics while a financial crisis gripped Hong Kong and pressure mounted on Britain in the absence of visible progress. Thatcher turned to Henry Kissinger for advice over dinner and got a secret US state department briefing on how to negotiate with China. It warned her to expect ‘an exasperating ordeal’ but noted that ‘tenacity often pays off’.

From Deng’s perspective, inaction paid off. He had ideological cover, for in 1949 Mao had vowed to ‘refuse to recognise all the treasonable treaties of the Kuomintang period’ but this specifically excluded the nineteenth century pacts. Nonetheless, the British learned from ‘secret sources’ that he planned to announce his resolve to take back Hong Kong.

To avoid panic in the colony – whose people knew nothing of these machinations – Thatcher agreed to a key concession after a meeting at which she pushed her advisers to test every option. In the end, Cradock drafted a letter from her to the Chinese premier, Zhao Ziyang. It said that if an acceptable agreement was reached, ‘I would be prepared to recommend to parliament that sovereignty over the whole of Hong Kong would revert to China’.

Twenty-two rounds of talks began on 12 July 1983. Early on, Britain also gave up the idea of continued administration, the last hope of its colonial loyalists. But in many ways, it conducted a textbook retreat. The negotiators crafted a text of a Joint Declaration in which China made detailed commitments:

The current social and economic systems in Hong Kong will remain unchanged… Rights and freedoms, including those of the person, of speech, of the press, of assembly, of association, of travel, of movement, of correspondence, of strike, of choice of occupation, of academic research and of religious belief will be ensured by law in the Hong Kong Special Administrative Region.

 Private property, ownership of enterprises, legitimate right of inheritance and foreign investment will be protected by law.

Finally, pressed by David Wilson, the Chinese agreed that future leaders of Hong Kong would be chosen by ‘elections or consultations to be held locally’. All such ‘basic policies’ would ‘remain unchanged for 50 years’ after 1997.

These were remarkable concessions by a communist dictatorship and, as the Americans predicted, they came at the eleventh hour. Deng had imposed a deadline of 1 October 1984. Early one morning, Thatcher was woken up in Downing Street to an urgent message from her foreign secretary, Geoffrey Howe, in Beijing, saying that ‘we have pushed the Chinese to the limit’. The deal was done.

To her final days, Thatcher was burdened by the fate of Hong Kong. Millions of its people, who held British nationality, did not get the right to come to the United Kingdom until 2020, seven years after her death. But she was a realist who mastered detail and did not shrink from hard decisions. ‘I do not pretend the agreement is ideal in every respect,’ she wrote to President Ronald Reagan, ‘but I am convinced it is a good one.’

The Joint Declaration is registered as an international treaty at the United Nations. It held up after the Tiananmen Square massacre of 1989, the handover in 1997 and for more than a decade of turbulence after that. Cradock, who died in 2010, called it ‘the territory’s sheet anchor, without it, Hong Kong people would be in Chinese hands with no protection at all’.

For a while, China had reason to show that it kept its word. It wanted to join the World Trade Organisation in 2000 and to stage the Olympic Games in 2008. It curbed democracy but let freedoms flourish in Hong Kong until a new leader, Xi Jinping, came to power in 2012. Faced with mass protests in 2014 and 2019, he invoked the Basic Law, in which China had codified its pledges to the city but added the right to intervene in the event of ‘chaos’. A harsh new National Security Law imposed the same vague but absolutist powers which reign over the rest of China.

Chinese diplomats were quick to disown the Joint Declaration as null and void. Yet it still has legal force. For all its faults – acknowledged by Thatcher herself – it achieved two aims. It bought Hong Kong roughly three decades of freedom after 1984, in which a keen young generation, exemplified by figures such as the student leader Joshua Wong, came of age. More important, it bound China to the principle that nations do not break pacts but negotiate to change them. That was an unsung victory for the international order.

Pacta sunt servanda, indeed, however long or short their lives, as Ukrainians may reflect on the Budapest Memorandum of 1994 by which Russia, Britain and the United States guaranteed their security. ‘I take a bleak view of the international scene,’ Cradock wrote in his ‘First Notes’ for Thatcher, ‘it is a world where as Thucydides put it “the strong do what they can and the weak suffer what they must”.’

Unfair and ‘unequal’, no doubt, but all treaties are unequal, for if a perfect balance existed between states, no diplomatic agreements would be needed to keep the peace between the weak and the strong. It is just that some treaties are more unequal than others.


Michael Sheridan