793.94/15749: Telegram
The Ambassador in China (Johnson) to the Secretary of State
[Received March 9—10:50 a.m.]
120. I offer following comments on observations made during recent visit to Peiping, tour of Yangtze and journey Shanghai to Chungking via Hanoi and Kunming.
1. Great numbers of Japanese have followed army into North China and are engaged in operating communications services by rail, air and motorcar, telephone, telegraph and radio; public facilities such as electricity and water; and there is much planning for the future. Chinese population seems less afraid of Japanese than was reported to be the case in the beginning of trouble and evidence little interest in state control plans which Japanese appear to be prepared to carry forward with or without Chinese cooperation. All activity [Page 295] [is] based upon unconvertible currency issued by Japanese agencies and known as B currency which gives unstable economic background to whole business and state control structure. Link system now enforced plus blockade of British Concession [at Tientsin] has killed normal trade, leaving B currency entirely dependent upon business with Japan and ability of holders to convert it into Chinese national currency, still only currency with exchange value.
[2.] Communication facilities and public utilities of Yangtze Valley from Woosung to Yochow are held in iron grip of Japanese Army and all commerce on the river is in the Japanese Army’s control. The Japanese Army through its special service section has been busy preparing for the setting up of a political Chinese machine with its seat at Nanking, the old capital of the Chinese Republic, to serve as a legal facade for the setting up of so-called Sino-Japanese companies to operate these public utilities as monopolies. Thus far the Japanese Army has refrained from any attempt to introduce into this area a printed currency of its own, paying for its purchases with military script with [which?] Chinese holders convert into Japanese made goods as fast as they can.
3. The Japanese Army aided by the Navy have blockaded or occupy all treaty ports along the coast of China and have attempted to cut all normal routes from the interior into such ports, apparently for the purpose of cutting off all access to Chinese products or to Chinese markets except through channels controlled by them.
4. In spite of this blockade, large quantities of Chinese products are finding their way out of various unopened Chinese ports along the coast by junk and other small conveyance to Hong Kong [to be?] sold for the account of Chinese merchants, such transactions involving considerable amounts of exchange between foreign currencies and Chinese national currency. Chinese national currency still prevails throughout Chinese territory except in areas immediately adjacent to Japanese garrisons, supported by Chinese confidence in their own government, considerable amounts of exchange derived from the exports above referred to, large remittances from Chinese living abroad which continue to come through Chinese controlled banks, and by Japanese goods bought in China with Japanese military notes which add to the country’s stocks of needed materials from the outside, the importation of which constitutes no burden of [on?] the Chinese currency.
5. Communications between interior China and the outside world through French Indochina are being increased by additional roads now under construction, inability of Japanese permanently to injure the Yunnan Eailway, present through connection by railway and road between Haiphong and Luhsien on the Yangtze with cheap waterway [Page 296] connections between Luhsien and other parts of Szechuan. The Burma Road is being developed and gives direct connection between Szechuan and Burma. The roadway between Szechuan and the Russian border is in operation throughout except in winter.
6. The Japanese invasion with its attack upon Chinese cultural and industrial development has driven into this section of China all of the trained Chinese engineers, chemists, and cultural leaders who are settling down and working hard at developing the latent mineral and agricultural resources of this area. They are busily at work developing mines, increasing wheat, cotton, and vegetable oil crops, opening motor roads, developing methods of producing fuel from vegetable oils, developing oil wells in Kansu and Sinkiang, smelting copper, lead and tin, and developing hydroelectric power. They are making a beginning which is already showing results. Dependent upon their ability to win the support of the people they have resources in man power and of a natural kind in this area sufficient to create a power of considerable weight. Up to the present they have been meeting with success because of the high handed methods of the Japanese military, which have created a feeling of hatred against Japan and Japanese among all Chinese that dominates their minds to the exclusion of everything else when a Japanese is concerned. It is conceivable however that guided by wiser counsels the Japanese, possessed of China’s chief lines of communication and the principal treaty ports of entry, might open these facilities in such a way as to make them once more the easiest and cheapest way for products of China to reach the outside world in which case it would become exceedingly difficult for Chinese authorities in the interior to prevent Chinese merchants and farmers from selling their products in the markets giving them the most for their labor.
The Japanese up to the present have been handicapped in their use of the facilities which they have taken over by lack of capital and an unwillingness to share what they have taken either with the Chinese or with nationals of third powers who have the capital to invest.
7. My observations convince me that this year will be a critical one for both Chinese and Japanese in the solution of their present difficulties and that at the moment Chinese difficulties appear from this angle of observation to be less critical than those facing the Japanese because of the current domestic situation in Japan. The Chinese can still feed and clothe themselves without difficulty, and the Government still has the support and confidence of its people.
Repeated to Peiping and Shanghai. Shanghai please mail to Tokyo.