CHINA has apparently toned down its threat of using trade as a weapon against Britain should the Sino-British dispute over Hongkong's political reform remain deadlocked. The Prime Minister, Mr Li Peng, gave an assurance yesterday that British firms would still be welcome to take part in such lucrative projects as Guangzhou's underground railway and Shell's multi-billion-dollar project in Huizhou. However, he warned that economic and trade relations between the two countries ''would be affected to a different degree'' should the present stand-off worsen. The statement came shortly after China cleared a legal hurdle for an early start in setting up its ''new kitchen'', the term used to describe Beijing's preferred political structure after 1997. Delegates to the National People's Congress (NPC) overwhelmingly approved a motion authorising the Standing Committee to form working groups for the Preparatory Committee on setting up the Special Administrative Region (SAR). Tabled by the Guangdong delegation, which included 28 Hongkong deputies, the motion was favoured by 2,828 delegates, with 21 against. There were 22 abstentions and four did not vote. Also approved was a resolution on the government work report, which briefly touched on Hongkong. The resolution maintained that the Chinese Government was firmly against British authorities creating obstacles for the resumption of Chinese sovereignty over Hongkong. The motion approving the ''new kitchen'' does not mention the political dispute and lacks details, such as its composition. Sources said the NPC standing body was unlikely to discuss the matter at its meeting this month, adding that the earliest time would be in June. British Ambassador to China, Sir Robin McLaren, who sat through the NPC closing session, was cautious and said: ''Whether the working group is helpful for a smooth transition depends on what it does.'' At his first press conference after being re-elected for a five-year term on Sunday, Mr Li maintained that the ''only'' purpose for setting up the working body was to ''ensure a smooth transition of Hongkong as well as its long-term prosperity and stability''. Under the Basic Law, the Preparatory Committee for the SAR will be formed in 1996. ''Time is pressing and there is a lot of work to be done. We have to do a lot of things in advance,'' he said. The early start of groundwork for the SAR is seen as a tit-for-tat move by Beijing to counteract the plan to press ahead with Governor Mr Chris Patten's political package. Stressing that the Chinese side still wanted talks, Mr Li said: ''It is the British side which shut the door for talks. We have to wait and see whether it will shut the second door. It's up to those who tied the knot to untie it.'' Speaking at a meeting with Hongkong's NPC deputies in the morning, NPC chairman, Mr Qiao Shi, said he hoped Hongkong would overcome the difficulties and attain a smooth transition.