693.002/662: Telegram
The Ambassador in Japan (Grew) to the Secretary of State
[Received May 24—7:34 a.m.]
328. 1. Sansom and Hall-Patch have now returned to Tokyo and Craigie sent me yesterday a letter summarizing their observations on foreign exchange conditions in North China and his views on probable results of insistence that the Japanese Government provide foreign exchange as follows:
“As regards North China the position is that the Japanese banks are at present not competing for any export bills for destinations other than Japan. This leaves the foreign banks perfectly free to acquire [Page 716] these bills and, pro tanto, to finance foreign imports. As the foreign banks purchase these bills with Chinese national currency they are, in fact, providing the only support for that currency in North China, as the Hankow Government is making no allotments of exchange to Tientsin.
The Japanese authorities cannot be said to be acquiring any foreign exchange which, in the ordinary course, could be made available for the service of customs secured foreign loans. If, in existing circumstances, they are pressed to provide this foreign exchange, there seems only two courses open to them:
(a) To compete with the foreign banks for export bills, or, (b) to impose exchange control and to attempt to make the Federal Reserve Bank an effective central bank for North China. Either course would produce results inimical to foreign trade interests.
Turning to Central China there is, as you know, no Japanese sponsored currency in existence in that area, and customs duties are collected solely in Chinese national currency. It seems clearly the responsibility of the Hankow Government to exchange these collections into foreign currency for amount necessary to meet that portion of the foreign loan service chargeable to that area.
Here again if we insist, in present circumstances, on the Japanese authorities providing the foreign exchange to meet the customs secured foreign loans, they can only do so by imposing some form of exchange control, unless they provide the foreign exchange from their own reserves in Japan, which seems inconceivable. Exchange control in Central China would imply a severe restriction of imports in view of the adverse balance of trade in that area. Moreover, the Japanese would be sorely tempted to set up a new bank in Central China on lines similar to the Federal Reserve Bank in North China as a means of obtaining complete financial control in the area. If any such new bank is created in Central China, I fear it will be the final blow to the Chinese national currency and complete currency collapse would sooner or later ensue. Either exchange control or a new bank of issue in Central China would again hamper all foreign trading interests.
I quite recognize that it is most reprehensible of the Japanese to have launched a new currency in North China which can be employed in discharge of customs duties while at the same time making this currency convertible. Nevertheless, I feel that the dangers of insisting at this juncture on payment through Japanese agencies of the foreign currency necessary to meet the customs secured foreign loans may lead to measures being imposed which, on other and more general grounds, we are pointing out to the Japanese Government are undesirable and prejudicial to foreign interests.”
2. Craigie feels strongly that if the Chinese Government learns that we are pressing the Japanese to furnish foreign exchange the Chinese authorities will become more intransigent.
3. We shall not repeat this telegram to Shanghai or Hankow unless the Department so directs.