Use of that 'blunt weapon', which President Bush had resisted, would hit precisely the wrong people hardest - 'those who are building small businesses which are the heart of China's growing free enterprise' - she told peers during a debate on Hong Kong.
It would also hit hard at Hong Kong itself, many of whose people had come from China to live under the rule of law and a democratic system, she said.
In a speech noteworthy for its high praise of Chris Patten, she said the 'new, imaginative and competent' governor had 'struck the balance' with his 7 October proposals for the colony's 1995 elections, despite the Chinese outrage that followed them. This, critics claim, has flowed from Mr Patten's failure to have detailed discussions with the Chinese beforehand.
Lady Thatcher said China's reaction - the launch of a public opinion campaign and threatened interference with contracts extending beyond 1997, when Hong Kong reverts to China - was 'regrettable and unjustified'.
While numbers of peers agreed with that, the former prime minister's uncriticial stance towards the new governor's brand of Anglo-Chinese diplomacy contrasted with contributions from other speakers, including two of Mr Patten's predecessors.
Lady Thatcher insisted Mr Patten had acted with 'great sensitivity and skill' when introducing his proposals for elections in 1995.
Lord Holme of Cheltenham, for the Liberal Democrats, was among a number of peers who urged a cooling-down period and an end to 'megaphone' diplomacy. But backing Mr Patten, he said: 'We believe the Governor should act steadfastly in his modest and realistic proposals for amplifying democracy in Hong Kong.'
However, Baroness Blackstone, for Labour, said the timing and method of Mr Patten's announcement in the Legislative Council in October might have lost more than it gained. China had reacted in a 'rather ridiculous fashion', but she wondered whether Mr Patten was being 'too clever by half'.
Opening the debate, Lord Geddes, a Conservative hereditary peer, accused Mr Patten of having a 'Westminster approach' to an Oriental situation.
Lord Maclehose (Independent), a former Hong Kong governor, said that while Mr Patten was the 'most consummate communicator that there has ever been in Government House', his proposals had resulted in a 'scale of invective I can't remember since the Cultural Revolution'.
Lord Sharp (Conservative), president of the Anglo-Chinese Trade Council, said the deteriorating relations between Mr Patten and China were 'unnecessary and fraught with danger'.
The vast, silent, majority in Hong Kong wanted a job, a good standard of living and the chance to make money, Lord Sharp said. They would not understand or accept confrontations with their new masters which would imperil what had been achieved through consultation and agreement.
However, Baroness Chalker, Minister of State at the Foreign Office, said: 'We seek renewed dialogue with China with the aim of narrowing differences and restoring the co-operative relationship. That is the best basis for Hong Kong's prosperity and stability.'
Replting to the debate, she said that for Mr Patten to have spent months and months discussing the proposals with the Chinese government in private would have led to speculation and uncertainty in Hong Kong, damaging stability and prosperity.
Lady Chalker rejected claims that Mr Patten's policy speech was a fundamental change in Britain's approach. 'There is no change,' she said.Reuse content