Office of the Historian

893.51/3–2646: Telegram

The Counselor of Embassy in China (Smyth) to the Secretary of State

Chungking, March 26, 1946—9 a.m.
[Received March 26—7 a.m.]

565. From Adler to Secretary of the Treasury.

1.
Informed by Pei that up to March 18 Central Bank had sold US dollars 7.1 million for cotton imports and that appointed banks had covered a further dollars 1.3 million of cotton imports with US currency acquisitions. Pei asks me to inform you that unless you have any objection he proposes to use the US dollars 13.5 million1 from the 1942 $500,000,000 loan to China, which he says Treasury had already agreed to have credited to Central Bank’s general account with Federal Reserve Bank of New York to finance purchase of textiles in Latin America, as cover for cotton imports including the dollars 7.1 million already sold, as China has cancelled its Latin American orders.
2.
There is no complete breakdown of allocations of and demand for foreign exchange for financing cotton imports owing to gap in reporting system of interbank dealings, which Central Bank is now filling. Therefore, it is not known how much of the US $40,000,000 of cover use in interbank dealings in 2 weeks after March 4 went to finance cotton imports. But according to data supplied by four leading cotton brokers to Central Bank, in addition to items specified in 1 above:
(a)
There are $5,000,000 of unpaid for cotton imports which arrived prior to March 4 when exchange regulations went into effect. Central Bank has instructed importers to obtain cover for this item from Chinese blocked assets in the US.
(b)
Cotton imports to the value of dollars 27.7 million were contracted for before March 4, some of which has already arrived and the remainder of which is either enroute or scheduled for arrival in the near future. Only US dollars 3.1 million of this item had been paid for.
(c)
Unsold consignments totalling US dollars 20.7 million are afloat or scheduled for arrival in the near future.
About 70% of the unpaid part of 2(b) and 2(c) is American.
3.
Pei has decided to freeze granting applications for cover for 2(c) pending clarification of applicability of Eximbank cotton credit to the approximately US $15,000,000 of this item representing American cotton. He asked that this question be raised with Eximbank, as it is his feeling that there should be no objection to use of Eximbank cotton credit for cotton neither contracted for nor sold before March 4. He indicated that the situation is urgent as cotton is arriving which will have to be stored pending final decision as to method of financing. A prompt clarification would therefore be appreciated.
4.
Pei and Exchange Control Authorities seriously perturbed by very large demand for cotton. They suspect that some importers had already obtained at least part of their cover for item 2(b) by acquisitions of US currency from open market prior to March 4; they are therefore hesitant about committing themselves to provision of cover for this item without further investigation. They also suspect and with some justice that part of the demand for cotton represents an attempted flight into commodities.

According to Agricultural Attaché Dawson, on basis of reasonably optimistic estimates of restoration of cotton mill capacity China does not need more than about 550,000 bales of cotton imports during next 6 months. According to leading Shanghai cotton brokers, amount of cotton imported, enroute, or scheduled for delivery in near future and therefore available for production in next 6 months, including UNRRA shipments, totals 750,000 bales. It is suggested that this situation be called to attention of Eximbank and UNRRA so that shipments can be staggered in order to prevent overstocking and hoarding.

It will be recalled that Stabilization Board was confronted with similar problem on a smaller scale when it commenced operations in August, 1941, though with the difference that Shanghai was already well stocked with cotton in mid-1941. The Exchange Control Authorities feel that if the demand for foreign exchange to purchase cotton continues at its present rate, some remedial action will be called for. They feel that it may soon become necessary to ask the appointed banks to submit applications for exchange for purchase of cotton to Central Bank for approval or at least to institute a “gentleman’s agreement” by which appointed banks would not grant exchange for cotton above certain amounts without consulting Central Bank. A more drastic measure would be to place cotton on the restricted list of imports, but while one official did mention this possibility to me it is doubtful whether such action would be taken save as a last resort. [Adler.]

Smyth
  1. In telegram No. 65, May 1, the Treasury indicated that the use of these funds was entirely a matter of Chinese responsibility.↩