Foreign Relations of the United States, 1946, The Far East: China, Volume X

893.24/1–1746: Telegram

The Acting Secretary of State to the Embassy in China

Washington, January 17, 1946—6 p.m.

101. For General Marshall. 1. There are several problems outstanding with the Chinese arising out of lend-lease, surplus property disposal, credits previously extended to the Chinese, yuan advances, and related matters. This Government wishes to inaugurate discussion with Chinese leading to settlement of these matters at an appropriate time. Would appreciate your views. The problems in question are outlined in the succeeding paragraphs.

2. US Army and Navy Yuan Obligations.

A. These are obligations to compensate Chinese (a) for Yuan expenditures by Chinese on behalf of U. S. armed forces in China; and (b) for advances of Yuan to U. S. armed forces for procurement of services and supplies in China. In the past amounts of U. S. dollar payments for such Yuan advances were not settled at official exchange rate but were determined by mutual agreement from time to time. Two U. S. dollar settlements with Chinese have already been made⁸ covering Yuan obligations through 1944, but estimated 130 billion Yuan advances for calendar year 1945, plus advances for 1946, remain to be settled.

B. The problem is the extent to which it is possible and appropriate to offset against any U. S. dollar obligation to pay for Yuan advances and expenditures the value of assistance furnished to China through lend lease, sale of surplus property, extension of credits, etc. The general objective of the Government in this connection is contained in recent policy statement of National Advisory Council which reads:

“When General Marshall deems negotiations desirable, the U. S. will negotiate with China simultaneously on war settlements, including settlement of U. S. Army and Navy obligations to China, the sale of U. S. surplus property in China, and the settlement of lend-lease. The U. S. negotiators shall be guided in such negotiations by the principle that the Chinese Government should agree to offset Chinese obligations on account of lend-lease and the purchase of surplus property against the U. S. Army and Navy obligations.”

3. Lend-Lease pipeline in United States.⁹

A. This point covers pipeline of supplies in U. S. contracted for but not transferred before V–J Day. Pipeline is valued at $62 million of which transportation equipment is $33 million, textiles $7 million, miscellaneous $10 million, freight and services $12½ million. It is estimated that $20 million of these supplies have been shipped and that balance will be shipped by summer 1946. In an exchange of letters¹⁰ between FEA¹¹ Administrator Crowley¹² and Mr. Soong,¹³ which is viewed here as a firm commitment, the Chinese were offered and accepted these supplies on credit terms over 30 years at 2⅜ percent interest. Although U. S. is committed to deliver supplies, and China has agreed to pay for them at cost plus transportation and packaging, no formal agreement exists as to details of the transaction. Chinese may request 10 percent discount on agreed price citing similar concession to USSR as a precedent. Any such request will probably be received unfavorably.

B. Chinese continue to press for negotiation of detailed agreement under paragraph 3 (c), Lend-Lease Act,¹⁴ to formalize commitment contained in Crowley–Soong correspondence. As supplies are going forward under commitment covered by Crowley-Soong letters, present view here is that it is not necessary to sign formal agreement now as a separate matter, but rather to try to include this matter in overall settlement envisaged in NAC¹⁵ policy outlined in paragraph 2B.

4. Civilian lend-lease inventory in Chinese possession on V–J Day.

A. This category refers to supplies obtained by civilian agencies of the Chinese Government and still unconsumed and in their possession on V–J Day, which are estimated here to have had a procurement cost (exclusive of transportation and packing for which approximately 25 percent should be added) of $20 million. Precedent for disposition these supplies is found in British over-all settlement¹⁶ wherein U. S. will receive fair current value of similar type supplies held by British on V–J Day, the date set for termination of civilian lend-lease. Fair current value was utilized in this category in British settlement rather than 100 percent of actual cost referred to in paragraph 3A because of cost to U. S. of recapture and because depreciation of value prior to V–J Day may properly constitute non-reimbursable lend-lease. Understand that Chinese are proceeding with preparation of inventory which they have been requested to submit.

B. Although policy of requiring repayment for this type of supplies has received general agreement in the Government and is supported by British precedent, open questions in this category are the price at which these supplies are to be valued and the terms under which payment will be exacted.

5. Military lend-lease supplies in Chinese possession on V–J Day.

A. Under Chinese lend-lease agreement,¹⁷ President has right to request return, at the end of the emergency, of all lend-lease supplies (both military and civilian) not lost, destroyed, or consumed. General policy has been to write off lost, destroyed, or consumed supplies whether civilian or military in type. In the British settlement, as indicated in paragraph 4A, repayment was requested for those supplies not lost, consumed, or destroyed which were held by civilian agencies. However, acceptance as a precedent of the method of disposition adopted in the British settlement of supplies not lost, consumed, or destroyed and held on V–J Day by military and naval authorities would permit China to retain these supplies for its own use (without right of transfer to other nations) without payment, reserving to the U. S. the right of recapture, coupled however, with a general assurance that there is no present contemplation of exerting the recapture right. Excluded from this category and that in paragraph 6 are lend-lease aircraft useful for commercial operations which are subject to different consideration and will be treated in later message.¹⁸

B. Although the total value of military transfers of goods and services before V–J Day is estimated at approximately $700 million, no inventory of the supplies in this category, not lost, consumed or destroyed and held by the Chinese on V–J Day, has been requested; and their exact amount is not known. It is not likely that such inventory will be requested because of the peculiar situation controlling in China under which military lend-lease continued after V–J Day. Present policy in Washington would support an arrangement with the Chinese regarding such supplies similar to that previously agreed upon with the British, referred to in paragraph 5A above. Although precedent in the case of British settlement would in effect write off any obligation under this category as a cost of the war, the fact that the right of recapture exists makes disposition of this category important in any discussion of offset against the Yuan advances.

6. Military Lend-Lease Supplies Transferred to Chinese after V–J Day.¹⁹

A. All transfers of military supplies made to the Chinese after V–J Day have been made in the theater under JCS 771/18.²⁰ No complete information as to their quantity or value is now available in Washington, although estimates indicate the value of supplies and services so transferred in the first 2 months after V–J Day will exceed $400 million. Moreover, it is apparent that transfers being made currently are of substantial value, e. g., it is estimated the value of the winter clothing necessary for the equipment of the Chinese Armies being moved to Manchuria will exceed $20 million.

B. Military transfers after V–J Day might well be treated the same as those prior to V–J Day. In such case, supplies and services lost, destroyed, or consumed would be written off. The balance existing at such time as lend-lease terminates would then be handled in the same way as is outlined in paragraph 5. However, there are practical distinctions applicable to post V–J Day transfers. The transfer of supplies or services of such substantial value after public announcement of the general termination of lend-lease aid and after the close of the active combat phase of the war presents obvious political implications. Moreover, the transfers to China, effected after V–J Day, have substantial political as well as purely military significance to China and may have substantial post-war usefulness. Consideration is, therefore being given in Washington as to the advisability and propriety of applying some method of reimbursement to the military transfers made after V–J Day, at least to the extent of setting off their value against United States obligations with respect to Yuan advances.

7. Civilian Lend-Lease Inventory as of V–J Day in India–Burma Theater.²¹

A. This category involves approximately 60 thousand tons of civilian type supplies now stranded in India and was subject of 90012, dated 22 December,²² in which question of continuing negotiations with respect to their disposition between Chinese and FLC representative General Johnson²³ was submitted to you for recommendation. General Johnson has been instructed to clear all negotiations with you. It is assumed here from your 1285, dated December 26,²⁴ Johnson’s subsequent reports have been coordinated with you. He now reports that Chinese desire all supplies now in Calcutta, aggregating approximately 36 thousand tons which includes 57 hundred boxed three-ton Dodge commercial trucks. Johnson has recommended release of balance of FEA supplies located at Chabua and Sukkur as surplus. With respect to the 57 hundred trucks located in Calcutta, Johnson indicates a good commercial market in Philippines. FLC, Washington, proposes to advise Johnson, subject to his obtaining your concurrence, that he may dispose of Calcutta stockpile to Chinese under Lend-Lease Act on payment terms to be negotiated and to declare surplus to FLC for normal surplus disposition of stockpiles in Sukkur and Chabua as soon as formal rejection is received from Chinese.

B. Unless you determine to the contrary, fact that disposition of this category of supplies is rather far advanced and desirability of relieving burden on India–Burma Theatre makes it seem wise to continue to treat this question separately rather than to include it in any overall settlement but any obligation created as a result of such disposition may be considered in the overall settlement.

8. Surplus U. S. Property in China.

A. This category divides into the Army surpluses in West China and those in East China. General Wedemeyer²⁵ has already disposed of Army surpluses in West China²⁶ for $5 million down-payment, plus $20 million to be paid on 3 (c) terms and plus reduction of U. S. Yuan debt by 5,160,000,000 Yuan. Chinese agreed that if dollar value of Yuan advances to U. S. Army as finally settled should exceed $5 million U. S., they would use excess either to make payments on their $20 million U. S. balance due or to purchase other property in the United States. Before your arrival in China, China Field Commissioner of FLC had begun negotiations with Chinese for sale of surpluses in East China. The value of East China surpluses is not known here, but it is believed it exceeds the value of West China surpluses. East China surpluses include any Navy surpluses which may be shipped to Shanghai for storage and other Navy and Army surpluses now located in Pacific which could be shipped to China. No knowledge here of whether negotiations have continued since your arrival but assume you have been kept fully informed.

B. View here is that in light of NAC policy stated in paragraph 2B above, balance of West China surpluses should not be treated as a precedent in that the deferred payments of $20 million were not offset against Yuan balances. It is suggested that in over-all negotiations effort should be made to induce Chinese to permit the $20 million to be offset and that disposition of East China surpluses should include this offset feature.

9. Chinese Navy request to purchase Pacific surpluses on credit.²⁷

A. Admiral Mar²⁸ of Chinesse Navy has requested authority to purchase on approved credit terms $5 million worth of surplus property (machinery and supplies) which he has specifically located in various areas, mostly Pacific, and which is available for transportation to China for use by Chinese Government in Shanghai shipyard where U. S. vessels are repaired. He states that Soong refuses to include any part of this as offset against U. S. Yuan debt.

B. View here is that U. S. position should be consistent and that position should be maintained that sale of this category of supplies will not be made unless purchase price can be included, if the U. S. so desires, as an offset against the Yuan debt. Of course, if the obtaining of these supplies by the Chinese is of sufficient importance to your mission, that you are of the view that sale of this property should be negotiated without reference to the Yuan debt, question will be reconsidered in the light of your recommendation.

10. $500 million loan²⁹ to China approved in 1942.

A. The United States and China on March 21, 1942 entered into an agreement³⁰ under which the United States extended $500 million of financial aid to China. Determination of terms of settlement of this aid is set forth in Article II of the Financial Aid Agreement as follows:

“The final determination of the terms upon which this financial aid is given, including the benefits to be rendered the United States in return, is deferred by the two contracting parties until the progress of events after the war makes clearer the final terms and benefits which will be in the mutual interest of the United States and China and will promote the establishment of lasting world peace and security. In determining the final terms and benefits full cognizance shall be given to the desirability of maintaining a healthy and stable economic and financial situation in China in the post-war period as well as during the war and to the desirability of promoting mutually advantageous economic and financial relations between the United States and China and the betterment of world-wide economic and financial relations.”

This credit was extended at a time when it appeared that financial assistance to China might be a necessary prerequisite to her continued active participation in the war. China has at times informally indicated the view that repayment should not be demanded, and acceding to China would mean that the amount of the loan would become part of U. S. war costs. This Government has not accepted the Chinese view. However, the status of the loan has been the subject of many communications which have passed between the President and the Gimo³¹ and the Secretary of the Treasury and Mr. Soong and Dr. Kung.³² Mr. Adler of the Embassy Staff is familiar with the details regarding this item and can advise you.

B. The National Advisory Council is now considering the question of the settlement of the $500 million loan, including the desirability of including this item in an over-all financial settlement. Among the factors being considered is whether in view of the past history of this $500 million loan, its inclusion in any over-all financial settlement would appreciably strengthen the position of the American negotiators and, if not, whether it might not be more desirable to exclude the loan from any over-all financial settlement and thus make it available to obtain other concessions in the future.

11. With respect to the foregoing, it is desired to determine (1) whether the interest of the United States will best be served by negotiating the solution of all problems at one time or whether they may be handled piecemeal; (2) the timing of such negotiations; and (3) the place or places where the negotiations can most effectively be conducted, i. e., Washington or Chungking.

12. A. In the light of the NAC policy, referred to in paragraph 2B above, it is believed here, subject to your approval, that the solution to all questions posed should be sought in one over-all settlement negotiation except for the reservations indicated in paragraph 9 above with respect to the handling of the $500 million loan negotiated in 1942.

B. The timing of negotiations depends to a large degree upon the status of your negotiations in the discharge of your mission. So far as Washington Departments are concerned, their preference would be to institute negotiations promptly. However, the Washington view is that the effect of instituting negotiations upon your mission must, for the present, be the determining factor on this point. It may be that the immediate institution of negotiations would strengthen your hand as an indication of the good faith of the United States Government and its desire to reduce to agreed form the present unsettled condition, resulting from its economic relations with China during the war period. On the other hand, it may be advantageous to us to withhold the initiation of such negotiation until you have had opportunity to progress further your negotiations.

C. The fact that the U. S. records and personnel familiar with the history of the subject matters involved are more readily available in Washington than in Chungking would make it more convenient to negotiate the settlement here. On the other hand, only in Chungking can definitive answers be obtained from the Chinese Government. If negotiations were initiated in Chungking under your supervision, the United States side would benefit from the prestige of your present mission. It is recognized that if negotiations are to be initiated in Chungking, it would be necessary for the Government to augment the Embassy staff temporarily with experts familiar with the various problems involved. Even if negotiations were to be initiated in Chungking, it is likely that final details of the settlement would have to be completed in Washington. It is considered here that it would be practical if you determine that the initiation of negotiations in Chungking is desirable to obtain agreement upon basic principles such as (1) the extent to which the principle of offsetting the value of lend-lease assistance and surplus property sales against the Yuan advances and expenditures will be recognized; (2) the categories of lend-lease assistance which will be accepted as having been furnished without reimbursement of any kind, those categories for which immediate cash reimbursement will be required or which will be offset against Yuan obligations, and those for which credit reimbursement will be accepted; and (3) the financial terms upon which credit payments will be made, by category of supplies.

D. Your comments and recommendations would be appreciated.

E. Treasury has participated and concurred in this telegram.

Acheson

8. See letter of December 23, 1944, from the Secretary of the Treasury to the Secretary of State, Foreign Relations, 1944, vol. vi, p. 948; and letter of June 27, 1945, from the Secretary of the Treasury to Dr. Kung, ibid., 1945, vol. vii, p. 1108.
9. For further correspondence on this subject, see pp. 724 ff. and footnote 28, p. 743.
10. August 22 and 24, 1945, Foreign Relations, 1945, vol. vii, pp. 1133–1134.
11. Foreign Economic Administration.
12. Leo T. Crowley.
13. T. V. Soong, President of the Chinese Executive Yuan.
14. Approved March 11, 1941; 55 Stat. 31.
15. National Advisory Council.
16. See joint statement by the United States and the United Kingdom, December 6, 1945, Department of State Bulletin, December 9, 1945, p. 910. For agreements signed on March 27, 1946, see Department of State Treaties and Other International Acts Series (T.I.A.S.) No. 1509 or 60 Stat. (pt. 2) 1525.
17. Signed at Washington, June 2, 1942, Department of State Executive Agreement Series (E.A.S.) No. 251; or 56 Stat. (pt. 2) 1494.
18. See telegram No. 204, February 1, 9 p.m., to the Embassy in China, p. 767.
19. For correspondence on this subject, see pp. 724 ff., passim.
20. Copy not found in Department files; it implemented President Truman’s directive of September 5, 1945, regarding Lend-Lease.
21. For correspondence on this subject, see pp. 1060 ff.
22. Post, p. 1060.
23. Brig. Gen. Bernhard A. Johnson, Field Commissioner, China and Eastern Areas, Office of the Foreign Liquidation Commissioner (OFLC). The OFLC was established in the Department of State in October 1945 with responsibility for the disposition of United States surplus property in foreign areas, Lend-Lease matters and liberated area requirements.
24. Post, p. 1062.
25. Lt. Gen. Albert C. Wedemeyer. Commanding General, U. S. Forces, China Theater.
26. See Embassy telegram No. 2116, December 7, 1945, Foreign Relations, 1945, vol. vii, p. 1191.
27. For correspondence on this subject, see pp. 1069 ff.
28. Rear Adm. Pellian T. Mar, Chief of the Chinese Naval Construction Mission.
29. For correspondence on this subject, see Foreign Relations, 1942, China, pp. 419 ff.
30. Signed at Washington, Department of State Bulletin, March 28, 1942, p. 234.
31. Generalissimo Chiang Kai-shek, President of the National Government of the Republic of China.
32. H. H. Kung, formerly Vice President of the Chinese Executive Yuan and Minister of Finance.